There's a yawning gap in global crude prices, but here's why it's unlikely to last

Photo: Getty Images/James D. Morgan

There’s somewhat of an anomaly happening in global crude markets right now.

The gap between Brent and WTI crude prices has soared to almost $6 a barrel this week, the widest gap seen in two years.

This chart from Capital Economics shows the difference between the cost of a barrel of Brent crude compared to WTI crude, going back to the start of 2016.

Source: Capital Economics

According to Capital Economics, the yawning gap between the two this week reflects temporary shutdowns of oil refineries in Texas as a result of damage caused by ex-Hurricane Harvey, leading to a sharp drop in crude oil demand in the United States.

Capital Economics doesn’t expect the ballooning spread between Brent and WTI to last, not only because the shutdown in Texas is a temporary event, but also because of other fundamental factors.

Tom Pugh and Oliver Jones, economists at the Group, explain why:

First, the latest spike in the spread is largely due to the effects of Hurricane Harvey, which should mostly reverse before long. The storm has caused up to 4 million barrels per day of refining capacity to shut down, temporarily depressing demand for US crude oil. Admittedly, about 1 million barrels per day of US oil production has also been disrupted, but this has been more than offset by refinery closures. Although it remains to be seen whether or not there has been any long-term damage to refineries or production facilities from the storm, some refineries have already said that they hope to be up and running again very soon. This should help demand for US crude oil to bounce back.

Second, low US oil prices are likely to encourage exports, further boosting demand. Indeed, exports have already increased by about a third this year as the Brent-WTI spread has averaged almost $4 per barrel, compared to $2 per barrel last year.

Third, we think that US oil stocks should continue to fall in the coming months, which in turn should put more upward pressure on WTI prices.

As a result of these factors, Capital Economics says the Brent-WTI spread is likely to narrow to $3 per barrel by the end of the year.

It also expects that Brent and WTI futures will rally in the months ahead, forecasting that they’ll sit at $57 and $54 per barrel respectively by the end of the year.

They currently trade at $50.80 and $45.90 per barrel respectively.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.