Weekly Crude and WTI Oil Market Summary: WTI reaches highest price in 9 weeks

As I mentioned in my last weekly post, oil transactions were likely to see low volume over the past week due to the Christmas holidays and thus prices were likely to change mostly on big-name events. Indeed, over the past week volumes have been down as much as 81% below the last 100-day moving averages, and we have seen big price fluctuations as market sentiment regarding the likelihood of a US fiscal agreement to avert the so-called fiscal cliff has swung from positive, to negative, and back again.

While the WTI price finally reached a 9-week high on positive fiscal-cliff related news,  a negative market reaction to the later-than-usual weekly release of inventory data, which showed an increase in gasoline stocks, was enough to prevent WTI maintaining its highest point of $91.5, and instead the grade ended the week at $90.8. Despite both grades being affected by similar economic news, the WTI-Brent spread narrowed for a second week in line with the trade recommendation put forth in my previous post “The WTI-Brent Spread: narrowing in the New Year?”.

A Daily Summary

Both WTI and Brent futures for February delivery slid on Monday 24^th, with President Obama leaving for a Christmas break amid no fiscal agreement or even consensus that one would be reached; WTI fell -0.3% to $88.6 and Crude -0.2% to $108.8. These losses were more than offset by news on the 26^th that the President had cut short his vacation to return to Washington and resume budget talks, with WTI increasing 2.1% and Crude 1.7%. Despite these rises both grades had fallen from their high points for the day, but this is likely due to a number of short-term traders taking gains as momentum slowed from the rapid price increases that had taken both grades above known technical resistance areas indicated by Bollinger bands (see chart).

Both grades traded more-or-less sideways on the 27^th as both transactions volumes and news was slow. However, with volumes still low on Friday, both grades ultimately suffered losses as remaining traders reacted strongly to negative inventory news from the weekly EIA release. The report indicated that gasoline stockpiles increased 3.78 million barrels last week, almost 3 million barrels above the 850,000 increase that had been expected by analysts in an industry survey. This negative inventory news came in conjunction with negative petroleum consumption data, showing a drop in total petroleum consumption of 5.5% to 18.9 mB/D. This news that consumption had dropped by its highest level since August 17^thand that stockpiles were already rising rapidly, in conjunction with the expectation that consumption will drop greatly if the fiscal cliff is not averted, was enough to spook WTI and Brent market participants and the former grade fell -0.8% on Friday,  while the later dropped -0.5%. Despite these drops both grades experience a weekly gain, with WTI finishing the week 2.1% up at $90.8 and Brent increasing 1.5% to $110.6.

The Week Ahead

With fiscal cliff negotiations reaching the deadline of 31^st December, it is becoming more and more likely that a deal will not be reached in time, however there still remains hope that an interim deal will be pushed through to prevent such deep fiscal cuts coming in to effect, as reported in this article from the New York Times. Any type of deal should be slightly positive for oil prices; although with the large price increases seen on the 26^th of December it is possible some of the positive macroeconomic effects of such a deal are already priced in. Nevertheless, providing an interim deal is reached tomorrow, I expect both grades to increase on the week. A higher increase in the domestically produced and consumed WTI should serve to narrow the WTI-Brent spread further by the end of the week.