Brent-WTI spread dips below $5 but analysts say it will grow

International and domestic crude oil prices narrowed the price gap to less than five dollars last week, the tightest spread in three years, but many analysts predict that growing domestic production will cause the gap to again widen by the end of the year.

West Texas Intermediate closed on Friday at $103 per barrel, while North Sea-based Brent crude oil barely topped $107 per barrel, largely closing a spread between domestic and international crude prices that has ranged as wide as $25 earlier in 2013.

“The fundamentals don’t support the narrow spread, and as North American Market supply growth continues, the spread will widen and support refining stocks,” Tudor Pickering wrote in a Monday morning analyst’s note.

Tudor Pickering anticipates that an additional million barrels per day of domestic production will come online by 2016, again glutting the domestic market until the needed infrastructure is developed to handle it.

It’s a view shared by other energy experts.

“Even if we have this temporary narrowing because of new pipelines coming on, the long term trend is that that gap will widen,” said Amy Myers Jaffe, executive director for Energy and Sustainability at the Institute of Transportation Studies at the University of California, Davis. “We are going to have more and more light oil in the US. That will push the WTI price down relative to Brent over time.”

Several domestic and international factors are driving the recent price differential reduction, according to Tudor Pickering.

For domestic prices, new pipeline start-ups and increased rail transport have helped unclog some of the crude bottlenecks at new unconventional sites, while factors such as recent events in Egypt are playing a more ambiguous role.

Tudor Pickering, who has predicted that the 2013 WTI-Brent spread would stabilize at about $13 per barrel over the long-term, says that keeping the gap smaller will depend on whether pipeline capacity continues to keep up with growing production.

“If the $4 per barrel spread spread is justified, that means that we are long pipe capacity into Gulf Coast, and all inventory holders at Cushing who want access into the Gulf Coast market have it,” Tudor Pickering wrote.