Record midwest runs and inventory draws squeeze WTI-brent spread

Amid recent price volatility, a trend is emerging that points to divergent fundamentals on either side of the Atlantic: a tightening US market is causing the WTI-Brent spread to narrow, a dynamic that is likely to persist and lend support to the Dated Brent complex.

Key takeaways:

• The WTI-Brent spread is expected to remain narrow in the near term, reflecting a significantly tighter fundamental picture in the United States compared to the Atlantic Basin.
• Strong domestic demand is evidenced by record-high refinery runs in the Midwest (PADD 2), which touched nearly 4 Mbd this week, pulling barrels inland.
• Lower US exports are expected to support the Dated Brent complex, while a stronger pull for WTI from Asia and a weakening US dollar could add further pressure to the spread.

While the spread has seen significant volatility due to recent Middle East conflicts, its steady narrowing since the start of the second quarter reflects a robust domestic demand story in the US.

5-day rolling front-month WTI-Brent spread, $/bbl

Source: MarketView

The latest weekly data underscores this tightness. According to Kpler data, Cushing crude stocks registered another drop, part of a broader nationwide inventory decline for the third consecutive week. Cushing inventories are now at their lowest seasonal level in over five years. While the market's technical understanding of tank bottoms has evolved, suggesting levels slightly below 20 Mbbl would not cause immediate panic, the trend is bullish for inland crudes. The EIA’s Weekly Petroleum Status Report confirmed this picture with a substantial 5.8 Mbbl draw in nationwide crude stocks.

This inventory decline is being driven by powerful domestic demand, particularly from refiners in the Midwest. According to IIR data, Midwestern refinery runs (PADD 2) surged to a new all-time high this week, approaching 4.3 Mbd. This record-level demand pull is strengthening domestic differentials and re-routing barrels inland. In a significant market shift, WTI Cushing prices flipped to a slight premium over WTI Houston this week for the first time since late 2022, underlining the strong inland bid.

PADD 2 refinery runs, kbd

Source: EIA

As a result, the narrower transatlantic arbitrage is already translating into lower US exports, with forecast July loadings anticipated to be around 10% lower month-on-month. Fewer WTI barrels heading to Europe will inevitably tighten the Dated Brent market, especially during a period of seasonally strong regional demand.

Looking ahead, while the spread could eventually widen to align again with Aframax freight rates (TD25), two key factors could keep it narrow this summer. First, the pull for WTI into Asia could prove significant. ADNOC has already cut Murban crude allocations to Asia for the coming months, at a time when refining margins are healthy for Pacific refiners. Loadings of Midland crude to Asia have been rising steadily week-on-week since the end of May, suggesting WTI could fill some of this shortfall.

Second, a weakening US dollar, which slumped to a three-and-a-half-year low this week amid speculation of leadership changes at the Federal Reserve, could stimulate incremental global demand, particularly from emerging economies. This extra demand would further support WTI prices relative to Brent.

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