A flood of bearish news has pushed down oil prices to their lowest levels in months, with WTI nearing $45 per barrel and Brent flirting with sub-$50 territory.
With a bear market back, there is pessimism throughout the oil markets. Goldman Sachs is even predicting oil stays at $50 through 2020, a profoundly grim view of the state of oil supplies.
On the other hand, the contraction in U.S. shale is underway, so it is just a matter of time before the mismatch between supply and demand balances out.
For several years, WTI, which tracks U.S. crude, has traded at a discount to the more internationally-oriented Brent crude marker. There were a few reasons for this. The U.S. saw a surge in oil production, a familiar story to anyone watching the energy space over the past few years. Importantly, however, was the fact that pipeline capacity could not keep up with production, causing localized gluts in certain areas of the United States. Also, the ban on oil exports kept oil stuck within U.S. borders. That also contributed to a lot of oil sloshing around in the U.S.
As a result, the gap between WTI and Brent opened up after historically trading in concert. WTI started selling for a few dollars cheaper per barrel, a discount that was most pronounced in 2012 and 2013. The spread has continued to wax and wane, narrowing more recently because of a build out in pipeline capacity in the U.S.
However, the WTI/Brent spread has shrunk more dramatically since the collapse in oil prices. That is simply due to the fact that global oil markets started experiencing a glut of supply across the world in 2014, a development no longer confined to the United States. WTI even briefly traded higher than Brent earlier this year, before the discount returned.