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Trading dynamics in the oil markets have been topsy-turvy since early in the pandemic, when U.S. prices briefly fell below zero.

Oil prices have since rebounded strongly and are holding above $80 a barrel, their highest level since 2018. Now, a new oddity has cropped up: The two most closely watched gauges of oil prices are acting in unusual ways.

Brent crude, the international benchmark, tends to trade at a premium of several dollars to West Texas Intermediate crude oil, the U.S. benchmark. That’s because there has historically been a glut of oil in the U.S. and too few pipelines to transport it. High supply and steady demand have kept prices low. But in the past few days, Brent and WTI prices have converged rapidly. At Monday’s closing prices, WTI was just 61 cents cheaper than Brent, at $84.05 to $84.71.

The main reason behind the move is that demand has risen, while supply has remained about flat. About a month ago when the Brent-WTI spread was above $4, overseas crude buyers paid for tankers to come to the U.S. and buy U.S. crude at a discount, said Robert Yawger, director of energy futures at Mizuho Securities.

Supplies of U.S. crude in storage fell sharply, to the point where the amount of crude held in storage at Cushing, Okla., dropped by eight million barrels from Oct. 1 to Oct. 22, a 23% decline. The drop in supply has caused prices to rise, nearly to the same level as Brent. The 61-cent gap is the lowest since July. The last time WTI was higher than Brent was in May 2020.

On the one hand, the spread doesn’t matter that much to users of oil products like gasoline. It’s still expensive to fill your tank today, no matter the spread. But for U.S. refiners, the narrowing of the spread has been a problem. Refiners like


Marathon Petroleum

(ticker: MPC) and


Phillips 66

(PSX) benefit from the spread because they can buy crude cheap and then refine it into products that they ship overseas at higher rates. Because crude is an input cost, they can take advantage of WTI prices to boost profits. When the spread narrows, however, they lose that edge. Margins right now are at extremely low levels, Yawger said.

In the long run, low margins tend to sort themselves out. If refiners can’t make enough money, they’ll simply reduce capacity. Eventually, margins will rise again.

“It’s the circle of life and death in the crude markets,“ Yawger said.

Write to Avi Salzman at [email protected]

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