U.S. crude discount to Brent widens on Trump tax talk, OPEC

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18 January 2017, New York — U.S. oil prices hit their biggest discount to global benchmark Brent crude in five months on Tuesday as President-elect Donald Trump said an oil import tax plan would be too complex and as a global deal to reduce supply hits Middle East output.

The deeper the discount, the easier it is for U.S. crude producers to export oil to refiners worldwide. A glut in global supply had limited the appetite for crude from the United States until late last year, even after the United States had lifted a long-standing ban on exports.

The spread between U.S. West Texas Intermediate (WTI) and Brent is widening enough to open the window for exports for some U.S. crude grades, said Dominick Chirichella, senior partner at the Energy Management Institute in New York.

It was already wide enough in December for traders and major producers to line up a flotilla of carriers to ship more oil to Asia than in nearly two decades.

A proposal spearheaded by U.S. House of Representatives Speaker Paul Ryan to boost jobs and the economy by taxing crude imports and exempting exports has fueled expectations for tighter supply into the United States and bolstered WTI.

However, Trump called the tax plan “too complicated,” casting doubts on the passing of such a law and widening the spread between the two crude benchmarks.

The comments pushed U.S. crude’s discount over Brent to the deepest in nearly five months on Tuesday and just two cents away from the biggest discount since late February 2016.

An agreement by the world’s top exporters in late November to cut output has had a bigger impact on Brent than on U.S. crude. Most of the oil-producing countries that are cutting output price their crude against Brent, while in the United States the higher oil price is likely to lead to higher supply as shale producers increase activity.

Since the OPEC deal was announced on Nov. 30, the WTI-Brent spread has widened by more than $1 per barrel.

If the crude tax is not passed, the spread may widen further. Money managers piled into options in mid-December on the premise that the law would pass, one trader said. They bet that WTI could rise to parity with Brent in 2018, partly if the tax was signed into law.

On Tuesday, Brent futures lost 39 cents, to settle at $55.47 a barrel, while U.S. crude gained 11 cents to settle at $52.48.

*Devika Krishna Kumar; Editing: Simon Webb & James Dalgleish – Reuters

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