Weekly Oil Market Summary: Budget news to overshadow supply fundamentals over the coming week

 17^th – 21^st December

WTI Crude (02/13 contract) finished 2.1% up on the week at $88.7, having started the week at $86.9. Brent managed only a 0.6% rise on the week, increasing from $108.3 to $109. Hence the WTI-Brent spread narrowed from $21.4 to $20.3 over the course of the week.

The main piece of economic news affecting oil prices remains the progress of US political discussions regarding the so-called fiscal cliff negotiations. While there was some optimism an agreement would be reached at the beginning of the week, seeing both grades rise on Tuesday, this was offset later in the week as the Republicans rejected the Democrat’s latest negotiation proposal. Any potential new tax and spending cut law will now be voted on after Christmas, and with the time counting down market participants will remain worried that no deal will be reached, which would be negative for demand fundamentals of both grades.

A combination of two oil inventory reports, the American Petroleum Institute release late on Tuesday and the weekly EIA release on Wednesday, both reported a decline in US crude stocks and were positive to the prices of both grades; WTI increased 1.8% and Brent 1.4% on Wednesday. Given the total crude stockpiles actually fell by less than forecast, the increase in WTI was much bigger than would be expected by just the headline number. This could be due to the more detailed numbers provided in the report -  I’ll provide a more in depth post on the importance of these details after the holidays.

While prices of both grades rose slightly on Thursday, in part due to a second release of US GDP data for Q3 coming in higher than expected, this was offset on Friday by three main factors. This included the negative sentiment reflecting budget negotiations, and for WTI only, technical indicators and news regarding the BP Whiting refinery. With the Thursday price going above WTI’s upper Bollinger band (see chart below) there were indications the commodity may have been overbought that day, prompting some traders to lock in the profit and forcing the price back down on Friday. Furthermore Bloomberg reported in this article that the Whiting refinery upgrades will be delayed, and as I mentioned in my previous post, "The WTI-Brent Spread: narrowing in the New Year?" , such upgrades are integral for the narrowing of the Brent-WTI spread. Thus this news saw such houses as Goldman Sachs downgrading their views for the WTI price over the next three months. However Goldman analysts still see the WTI-Brent spread narrowing to $14 by the end of March, from its current position of $20.3. Interestingly, the spread did not widen on Friday despite this news. Whether this is an indication that markets believed the spread was already too wide, or whether the spread could actually widen over the next few trading days, remains to be seen.

With trading limited over the next week due to the holidays, markets could lag small fundamental factors but still move to big-event news. Hence, while my previous posts have predicted WTI to increase due to more favourable supply conditions (see here), this increase may be overshadowed if negative news is released regarding US budget negotiations. This should not change the fact that WTI will continue to increase into the New Year to come closer in to line with the Brent price. Hence while we may see both grades react similarly over the next week or two, WTI should begin seeing lower losses or higher gains than Brent on a daily basis as market activity picks up again in the New Year.

Happy Holidays!