WTI Crude Discount to Brent Widens on US Diesel Export Ban Speculation

Speculation that Washington could ban diesel exports to combat record-high domestic prices is widening the discount for U.S. crude futures relative to the global Brent benchmark. The spread signals that traders expect U.S. refiners to process less crude if they are unable to ship surplus diesel abroad.

WTI-Brent Spread Blows Out

The price gap between West Texas Intermediate (WTI) and Brent crude, the international benchmark, has expanded significantly as the market weighs the potential for a U.S. export ban. On Thursday, WTI futures traded at a discount of as much as $12.02 a barrel to Brent, the widest gap since May 6, according to LSEG data.

An export ban would trap a significant volume of diesel, the largest U.S. refined product export, within the domestic market. According to a note from Wood Mackenzie, this could force refiners to slash operations to prevent a rapid buildup in inventories.

• A ban would redirect an estimated 700,000 barrels per day (bpd) of diesel and gasoil into storage.
• This would fill Gulf Coast inventories to maximum capacity in just over a month.
• To prevent this, refiners would likely need to cut crude processing by over 2 million bpd, a 12% reduction from current rates.

Political Pressure Mounts

The discussion around an export ban has been driven by surging domestic fuel costs, with U.S. diesel prices hitting a record $6.528 a gallon this week, according to the AAA. High fuel prices are a major political concern ahead of the November midterm elections, placing a heavy burden on key sectors like farming and transportation.

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The White House on Wednesday denied reports it was preparing a 90-day ban, and Energy Secretary Chris Wright has stated a ban would not control prices. However, President Donald Trump said Tuesday he supported a ban. Reuters reported that Secretary Wright has recently contacted major refiners to discuss voluntary export restraints as an alternative.

Shipping Costs Complicate Arbitrage

Typically, a wide WTI-Brent spread incentivizes exports of U.S. crude, as traders can profit from the price difference. However, soaring global shipping costs, exacerbated by war risk premiums related to the U.S. conflict with Iran, have blunted this arbitrage opportunity.

Shipping crude from the U.S. Gulf Coast to Asia now costs around $50 million per very large crude carrier, compared to $16 million before the war, according to Signal Maritime. Bob Yawger, director of energy futures at Mizuho, estimates the WTI discount needed to offset shipping costs has doubled from roughly -$4 a barrel to -$8 a barrel.

Despite the wide paper spread, U.S. crude exports have remained relatively flat and are on track to fall for a third consecutive month in September, according to ship-tracking data from Kpler. "International crude is carrying a higher scarcity and logistics premium, while US barrels are struggling to clear abroad at current transportation costs," said Shohruh Zukhritdinov, CEO at oil trading firm NitrolOil.