The U.S. crude oil benchmark, as vividly illustrated in the accompanying chart, has experienced extraordinary highs and lows in less than two months relative to its European peer. The price swing is nothing short of unprecedented – yet so are the times in which it occurred. In fact, there is a method to the madness. WTI’s relative weakness to Brent in March and April stemmed from the initial shock precipitated by the Iran–U.S. conflict. Traditional buyers of Middle Eastern crude oil (mainly Far Eastern refiners), whose supplies travel through the Strait of Hormuz, first turned to Europe and to regions where crude grades are priced off Dated Brent in their desperate search for available barrels. Brent consequently received a massive price boost – not only in outright prices but also in its differential to WTI.

As tension in the Persian Gulf refused to abate, further action became necessary. It arrived in the form of a coordinated release of 400 million bbls of oil, of which the U.S. contributed 170 million bbls. Additionally, crude buyers in Asia were forced to look as far afield as the U.S. to secure the smoothest supply possible. Since the beginning of April, U.S. SPR inventories have plunged from 415 million bbls to 331 million bbls. U.S. crude oil exports, although off the mid-April high of 6.4 mbpd, remain historically substantial at 4.7 mbpd. Net crude imports are under 1 mbpd – a very rare phenomenon. One knock-on effect of falling net crude arrivals is a significant drawdown in Cushing inventories, the delivery hub for WTI and a critical factor in its price formation. For the week ending June 26, stocks fell below 19 million bbls, the lowest since 2008 and near operational limits.

As August Brent expired on the last day of June, the arbitrage weakened from –$2.40/bbl at the end of last month to –$3.50/bbl at the time of writing– still at the higher end of the historical range. The question now is how long the U.S. crude marker can maintain its relative lustre against Brent. The answer lies in the data. The reopening of the Strait has already been priced into the current arbitrage value, explaining the comparative vulnerability of Brent observed throughout May and June. However, the arbitrage is likely to weaken once U.S. crude stocks, both nationwide and at Cushing, begin to build, which will likely result from rising imports and declining exports. Under this scenario, it is reasonable to expect the arbitrage to gradually approach the lower end of the long-term range, around –$6/bbl (excluding the aberrations seen in March and April). No doubt, the road there will be anything but linear, given the ambiguity of global politics. To mitigate this uncertainty, options on the arbitrage, provided by CME Group, offer a structured way to take advantage of the potential softening of WTI relative to Brent.