The Death of the Brent-WTI Spread: Are Refiners Going to Get Crushed?

With TransCanada Corporation's Cushing Marketlink pipeline coming online in late January, inventories at Cushing -- the storage hub of the West Texas Intermediate -- have further eased. The pipeline, which connects Cushing, Okla., to the Texas Gulf Coast, is capable of carrying 700,000 barrels per day of crude. Not surprisingly, the dynamics of crude oil movement have been altered and have caused WTI prices to move past the $100/barrel mark for the first time since October. However, more importantly, the Brent-WTI spread has shrunk to less than $7 a barrel at the time of writing.

"Pipeline Crossroads of the World" monument at Cushing. Source: Wikimedia Commons.

Not a good sign for refiners
Since the two most widely traded crude oil benchmarks diverged in late 2010, a narrowing spread between Brent and WTI has never been a good sign for refiners. For example, the first half of 2013 saw gross margins tumble as refiners struggled with higher input costs. As takeaway capacity at Cushing increases and WTI prices move north, the question is: Are U.S. refiners in for trouble? Let's take a look.