Weekly Crude and WTI Oil Market Summary: WTI-Brent spread widens on limited Seaway capacity

21^th – 25^th January

A climb of 0.3% for WTI meant a 7^th consecutive weekly gain this week, making it the longest upward trend in the grade since 2009. While both WTI and Brent benefitted from upbeat, albeit tentative, macroeconomic signs in the US and China, WTI suffered mid-week due to problems with the Seaway Pipeline out of Cushing. A 1.3% weekly gain for Brent meant a second weekly rise in the WTI-Brent spread, which now stands at $17.4, up from $16.3 the week before.

Weekly Summary

WTI opened at $95.9 and Brent at $111.8 on what turned out to be a relatively slow news day on Monday. Given it was Martin Luther King Jr day in the US, trading volumes were particularly low. Meanwhile, traders were awaiting outcomes from a meeting of EU finance ministers in Brussels and the result of a Bank of Japan (BoJ) meeting in Tokyo. Overall there was no strong direction in either grade; WTI increased 0.1% while Brent declined -0.1%.

While the announcement came late on Monday night, it was not until Tuesday that markets could react to the announcement from the BoJ that the Bank would be engaging in monetary stimulus policy, committing to purchasing $145 million of assets a month in a similar programme to those seen in the US and the UK. The BoJ hopes that this will stimulate demand and inflation in Japan, which accounts for 5% of the world’s oil demand. While an announcement was expected, it was the open-ended nature of the purchase commitment that particularly buoyed markets.  The positive momentum from this announcement continued in the day as a number of economic surveys also saw positive results, with the German ZEW indicator of economic confidence  climbing to its highest level since May 2010 and a Bloomberg survey showing a majority of investors expected to increase their holdings of securities over the next 6 months. In particular a majority also expect equities, of which oil prices tends to be correlated, to provide the biggest returns. These positive indicators were further enhanced by positive sentiment in markets from expectations that the US House of Representatives would pass a bill temporarily suspending the nation’s borrowing limit. Overall WTI climbed 0.9% while Brent increased 0.6%.

Expectations of a supportive result regarding the US debt ceiling were proved correct on Wednesday, with policy makers suspending the debt limit until the 19^th May, providing the US with fiscal breathing room for a further few months and thus providing overall positive sentiment to markets on Wednesday. While the news was positive for Brent, an announcement that capacity on the Seaway Pipeline from Cushing was limited due to unforeseen circumstances severely knocked WTI prices, with the grade dropping -1.6%. While the limited capacity will mean further problems for those delivering WTI to Cushing, it also means some refiners may have to cut planned production and so demand may temporarily fall. With Brent increasing 0.4% on the positive US news, the fall in WTI meant a significant rise in the WTI-Brent spread, with the premium of Brent over the US grade increasing $1.90 to $17.6, the highest level in two weeks.

Thursday was another day that saw a combination of strong positives for oil demand expectations, with WTI rising 0.8% and Brent 0.4%. Positive macroeconomic indicators came from both the US and China, which together account for just over 30% of world oil demand. In the US, the weekly initial jobless claims figure fell to the lowest level since January 2008 while the preliminary Chinese manufacturing PMI, a sign of manufacturing strength, rose to 51.9 in January. Coupled with this macroeconomic news was the later than normal weekly EIA inventory data. While overall crude stocks came in higher than expected, the detailed breakdown showed some positive sign for both grades in terms of product demand while falling US net imports was positive news for US produced crude. For more on this see yesterday’s weekly EIA inventory post.

The German Ifo survey, an indication of German executives’ market confidence, increased for the third month running on Friday, while the European Central Bank announced financial institutions will utilise an early repayment opportunity to a greater extent than expected on loans issued from the ECB. While on any other day this news would have resulted in visible gains in the oil markets, a combination of gains throughout the week and overbought signs from technical indicators resulted in traders taking profits instead, and each grade remained stable on Friday. Overall WTI closed the week at $95.9 while Brent reached $113.3.

Week Ahead

Now the House has voted on suspended the federal debt limit for some months, the intensity of market reaction to domestic US political events may take a step down for a few weeks, with macroeconomic demand signs instead taking the main stage. With this in mind, look out for a number of important economic events out of the US this week, with both the advance Q4 2012 GDP number and latest FOMC meeting on Wednesday. Friday also sees the monthly non-farm payrolls release which is perceived as perhaps the most important macroeconomic indicator, providing an indication of economic strength through labour market developments. The ISM manufacturing index shortly after this will also give an indication of how US producers are faring. For a useful summary of these releases and market expectations see this article at Marketnews.com. In addition to this news, WTI is likely to see gains and the WTI-Brent spread narrow when there is confirmation that the Seaway Pipeline capacity is back up, which is expected this week.

Weekly Inventory Analysis: EIA release of 24th January

Summary of last weeks’ change in Crude Inventories figures:

API: +3.166 mb

EIA Consensus:  +2 mb

EIA actual: +2.8 mb

Note: EIA data was released at 16:00 GMT on Thursday this week due to the US holiday.

An increase of crude inventories of +2.8 mb was more than the market had expected, but with a number of positive details in the breakdown both WTI and Brent saw gains after the initial release. In particular, gasoline stocks and products supplied were both positive for the market, and this release also confirmed the first draw of stocks from Cushing since November in what was the first full week of data available since the expansion of the Seaway Pipeline.  Overall the rise in crude stocks has been primarily due to a fall in refinery input, with both US crude production and imports falling.

The Breakdown

Refinery data showed that producers continued to cut production last week, with utilization falling 4.3 percentage points to 83.6%. While this drop was large, refiners have showed similar low utilisation rates in January in previous years, in line with the build-up of stocks also normally experienced.  This fall in utilisation was reflected by a fall in net crude input of -895,000 b/d, although the data showed refinery production of gasoline continue to rise while distillate production fell.

While input declined as refiners sought to pare the build-up of product stocks, there were positive signs in the demand side data which showed both total petroleum products and in particular gasoline demand had increased for the second week running.  With the increase in gasoline demand resulting in a fall in gasoline stocks by -1.7mb, there were signs that gasoline inventories, which have risen recently to a particularly elevated level, were beginning to plateau.  Hence this news will have been taken positively by the market.

Another positive sign for US produced grades was the fact that net imports continued to fall; this week by a further 301,000 b/d. Net imports are now 771,000 b/d lower than they were at the highest point in December, although the series is perhaps the most volatile of the weekly data.

While increased product demand and decreased imports seem positive for US crude blends, the latest US crude production data also showed a decrease. While the series is also volatile, the small fall of -52,000 b/d could suggest the rate of US production increase is decelerating, which would allow infrastructure providers greater chance to catch up with production that spiked massively in 2012.

How Markets Reacted

Demand signals have been closely watched in the midst of the US economic recovery and political clashes over recent weeks. Thus despite the headline crude number coming in at a higher inventory gain than expected, the positive elements on the demand were met well and both WTI and Brent increased in the period immediately after the EIA report.

WTI, which was priced around $96.60 just before 16:00, saw an immediate fall of 0.10 in the first minute after the release and then moved up to just over $97.70 before traders took profits. The grade then fell to a similar position to its starting point, however this was due to an announcement that the Seaway Pipeline was experiencing capacity problems and thus the ability to get oil from Cushing to refiners on the gulf coast was hampered.

Brent also followed a similar pattern but managed to hold on to its gains. Just before 16:00 the grade was trading at around $112.10, with increases taking the grade up to $112.50 experiencing a short correction and going on to trading in a range. While the grade flirted with the $112.40 line several times in the afternoon, it failed to maintain any gains past what seems be a strong area of technical resistance.

For clarification see the one-minute charts, price in USD cents, below.

Next week’s release

With the Seaway Pipeline operating under restricted capacity for part of this week, the release on Wednesday will show the full effect on inventories at Cushing. Having said this, it is reported some storage in the area is now completely full and so there may be a limit to how much stocks in Cushing itself can increase, with crude simply staying in other parts of the country.

In terms of the overall report, demand side factors will continue to be the main point of interest for markets, with increasing gasoline demand a trend that investors would like to see continue in the coming weeks. With gasoline stocks now plateauing it will be interesting to see if refinery utilization picks up again in this week’s release, although with the presence of the US holiday such a result may have to wait for another week.

Weekly Crude and WTI Oil Market Summary: Geopolitical risk rises

14^th – 18^th January

Both Brent and WTI saw gains this week, with Brent rising 1.9% and WTI 1.8%. Although the percentage rise in WTI was smaller, the grade did jump up $0.3 on Monday opening from its previous close, and this meant the WTI-Brent spread did narrow $0.1 to $16.30. This lack of any significant narrowing of the spread, despite the completion of the Seaway Pipeline reversal, was caused by geopolitical tensions, with al-Qaeda linked to a terrorist attack at a gas production plant in Algeria. With many international oil blends linked to the North Sea grade, this attack had the effect of increasing the risk premium on Brent.

Weekly Summary

WTI saw a cautious increase on Monday, gaining 0.2% as the effects of the reversal of the Seaway Pipeline continued to feed through into less downward price pressure on WTI. Brent saw a large rise of 1.1% as a weaker dollar made the international grade more attractive for non-US buyers, with the dollar fall in part caused by comments from regional Fed governors saying that more monetary stimulus could be provided. Both grades also benefited from forecasts for colder weather throughout both the US and Europe that saw end-products such as gasoline and heating oil rise. Despite this upward pressure on oil prices, gains were pared by negative developments in equity markets as the President Obama made a surprise news conference to address political issues with the US debt ceiling, increasing market worry that the issue will not be solved in time.

Market continued to feel negative pressure regarding the US debt ceiling on Tuesday, with WTI losing -0.9% and Brent falling -1.3%. Despite this negative US news the USD strengthened due to its safe-haven status, and this also brought negative pressure to the USD priced oil grades. Elsewhere, preliminary estimates out of Germany also suggested a GDP fall of as much as 0.5% for Q4 of 2012, thereby confirming the weak demand picture across Europe.

There was a variety of news affecting oil markets on Wednesday. Firstly, as the FT reports, there was an oil leak in a North Sea pipeline that shut down 10% of UK oil production. An al-Qaeda linked hostage situation was reported in Algeria, and a further risk premium was priced into oil prices by the markets. However by the end of the day markets were focused on the EIA oil inventory release. With inventories unexpectedly declining, as mentioned in my previous weekly inventories post, there was a rise in WTI of 0.9%. While Brent initially reacted in a similar positive way, the grade ended the day 0.1% down, perhaps on signs of lower US refinery utilization and higher US domestic oil production.

Continued concerns of geopolitical tensions arising from the Algerian terrorist crisis led to further gains in both WTI and Brent on Thursday, with the former rising 1.4% and the latter 1.3% on the day. Of particular concern was that companies present in the region were evacuating workers and thus supply was likely to fall for an unknown amount of time. On top of these issues affecting supply sentiment, a couple of US data releases also gave a positive boost to demand sentiment , with the US housing market index and weekly jobless claims data both coming in as positive. The benefits of these releases were clear in other markets too; US equities also rose on the day. Some positive influence could also have been felt following a statement by the head of commodities research at Goldman Sachs, Jeffrey Currie, saying that Brent prices could reach $150 this summer. The full release can be read here.

The early morning release of Chinese GDP data came in higher than market analysts had expected, and provided a positive sentiment boost to the market, with the more internationally used Brent grade particularly benefiting  While Algerian news continued to be a large focus on oil markets on Friday, reports that the US House of Representatives will consider a bill to raise the US debt ceiling also provided support for prices. Gains were pared as this news also provided support for the USD, but nevertheless WTI finished up 0.4% while Brent climbed 0.7%, with the former reacting more strongly to geopolitical risk at the moment.

Although there were fundamental reasons for a limiting of oil gains, technical resistance also came in to play with traders taking profits at the end of the week as both grades reached their highest prices since October (see charts below). In addition to this another technical indicator, the relative-strength index, showed WTI may be overbought, which could be a sign current prices are unsustainable.

Summary and Week Ahead

While both grades have been on upward trends over the past few weeks, the fact that they have both now approached levels last seen in October mean there could be significant technical resistance in the markets that prevent the grades rising further unless particularly important news is released. Having said this, the structural change in the WTI industry with the Seaway Pipeline reversal could mean the technical indicators are less relevant than they would normally be. Indeed, markets seem to be uncertain which way crude is heading, and as this Bloomberg article reports, implied volatility of future Brent prices has risen to a high point this week

While geopolitical and US government news will continue to be a focus of oil markets this weeks, a couple of US housing market indicators will again be released this week while the US manufacturing PMI could show positive signs for US economic activity. 

Weekly Inventory Analysis: EIA release of 16th January

Summary of this weeks’ EIA crude inventories release:

API: +0.046 mb

EIA Consensus: +2.2 mb

EIA actual: -0.95 mb

This week’s EIA inventories release showed a shock fall in crude inventories, despite a fall in refinery inputs and operating utilization. Rather this fall in stocks appears to be a result of a large decrease crude imports. While US crude production continued to increase at a startling rate, there were also signs of demand picking up with an increased total petroleum products supplied number, including the much watched gasoline demand.

The Breakdown

Crude inventories fell by -0.95 mb in the US at the end of last week, against a consensus expectation of +2.2mb . Some of those surveyed would not have known about the API release that came in at a small increase of 0.046 mb, but given the fact the two surveys often differ from each other a negative number would not have been completely unexpected.

There were some signs in the breakdown that at first point seemed bearish. For instance gasoline stocks continued to increase for the 8^th week running, by 1.9 mb, to reach the highest point since February of 2011. However, as the chart below shows such a rise is normal for this time of year, with stocks peaking each January/February.

While there was a fall in crude inventories, there was also a fall in refinery input and utilisation levels  - hence it is natural to ask how this fall in stocks came about with a lower refinery demand. The answer appears to be in the import numbers, with crude imported into the US falling by 312,000 b/d last week.

While refinery demand for crude appeared to have fallen and product stocks remain elevated, the fact that refiners are at least switching from imports to domestically produced crude would appear bullish for WTI. While such a situation would mean the opposite for Brent, both grades could at least take some support from the higher levels of products supplied seen last week, with gasoline in particular seeing a rise of 310,000 b/d.

How Markets Reacted

The release was mixed this week, and while the headline number vs consensus was positive, the detailed release showed a variety of signs that could be interpreted as either positive or negative for each grade. What appears to be the key info for markets in this current economic environment are demand signs, and this week we have seen that products supplied have indeed increased and the demand for WTI in particular has gone up due to lower imports.

Just before the EIA release at 15:30 GMT, WTI was priced at around $93.58. As the one-minute graph below shows, in the few minutes after the release the price increased to around $93.85 before trading sideways for around 30 minutes and then jumping up almost another $0.50 to $94.30. In total the maximum gain in the hour after the release was just over 70 cents. The grade ended the day 80 cents higher than its open of $93.4 at $94.2.

Brent also followed a similar pattern. As the one-minute chart below shows, the grade was priced around $109.75 before the release, jumped to $110 within 2 minutes and then looked to be losing almost all of its momentum before rising up to reach a high of $110.35, a total increase of 60 cents. In total the grade finished just 10 cents up on the day at $109.7, falling in the remaining hours of trading.

This week’s release

This week’s EIA release will be the first that provides a full week of data on inventories after the restart of the Seaway pipeline since its reversal and capacity expansion, first mentioned in my previous post “TheWTI-Brent Spread”. This will therefore be an interesting release, and the key details to look out for will be how much of any refinery input change has come from this increased flow of US domestic oil versus imports. However, with the price of WTI already increasing to a large degree this week, it is likely the pipeline has had an effect on allowing some of the supply glut to be reduced. With this rough idea in mind, demand signs in the EIA release should continue to have a large impact on prices.

Weekly Inventory Analysis: EIA release of 9th January

Summary of last weeks’ change in Crude Inventories figures:

API: +2.36 mb

EIA Consensus: +2 mb

EIA actual: +1.31 mb

Last weeks’ oil inventory reports came in either side of the consensus expectation of around a 2 million barrel increase, with the API release showing a crude stock increase of 2.36 mb while the EIA release was 1.31 mb. Despite the official EIA release showing a lower stock build than the market expected, the detailed EIA release contained a number of bearish indicators that caused an immediate slip in the markets for both WTI and Brent.

The Breakdown

Although crude inventories, now at 361 million according to the EIA report, are at their lowest point since September, there were a number of negative signs relating to crude and crude-product demand in the US, as well as signs that high domestic production continues to supply the inventory overhang.

Both gasoline inventories and distillate inventories (heating oil, diesel etc.) increased far more than consensus expectations, countering higher gasoline prices earlier in the week which had implied supply may have dropped. This news of high product stocks, coupled with the fact demand for gasoline dropped to the lowest point since March and refinery output had fallen, pointed to the conclusion that demand for crude supplies would be falling over the coming weeks.

While imports into the US did rise last week, which would be a positive sign for Brent-indexed international crude, it was not enough to make up for the large drops in demand from the world’s largest energy consumer. Additionally this news reinforced the point that with the Seaway Pipeline reversal now in place, a potential 3.5 million barrels of WTI extra a week is now available to US refiners.

How Markets Reacted

Unsurprisingly from the all-encompassing bearish news, both Brent and WTI markets reacted negatively in the immediate period following the EIA release (10:30EST, 15:30 GMT). This example therefore reinforces the point made in last week’s analysis that one should not trade off the headline alone, which showed crude inventories had increased less than expected. Rather, markets react to what they see as future demand and supply potential. With gasoline and distillate inventories high refiners may cut their production to some extent to ensure they maintain a reasonable margin on products produced, and political issues may continue to spook consumers, and therefore demand, over the coming weeks.

As the one-minute charts below show, both grades saw an immediate negative reaction followed by a slight retracement. This retracement, common at the beginning of market trends whether on a day or 1 minute granularity, then led to a further fall for both grades. Hence in this case for a very short-term trader shorting either of the products after the price had fallen through the resistance at which the grades had previously retraced, $93.20 & $111.50, would then have led to small profits on closing of the position at a minimum buy-back price of $92.70 and $111.10 respectively.

This week’s release

Last weeks’ release showed the inventories at Cushing, Oklahoma had increased to their highest historical level. With the Seaway Pipeline extension now complete, it will be interesting to see in the what effect this will have on inventories in the region. While a whole week effect will not be seen until next weeks’ EIA release, more bearish demand data from the US will be particularly bad for Brent due to the lessened US import demand. 

Weekly Crude and WTI Oil Market Summary: Seaway Reversal Complete

07/01/2013 – 11/01/2013

The spread between WTI and Brent continued to narrow this week as the WTI continued to gain while Brent saw its first weekly fall since the beginning of December. The spread fell to $16.20, having been $18.20 a week earlier, on the back of WTI reaching $93.60 with a 0.6% weekly gain and Brent falling 1.4% to $109.8.

Daily Summary

There was little direction in either market on Monday 7^th as US political discussions regarding the federal debt ceiling continued, but no new information regarding the matter was released and both sides continued to hold their uncompromising views.

Tuesday saw Brent rise 0.4% to the upside while WTI slid -0.1%. While WTI was therefore more or less stable for a second day, there were competing factors at play. Firstly, the shutting of the 325,000-barrel-a-day Motiva refinery meant crude products such as gasoline and heating oil advanced, which would typically result in WTI moving higher as well. However a combination of an expectation of increasing inventories together with a fall in US equities, of which WTI is strongly correlated to, prevented any rally forming.

Wednesday was again noticeably absent of any serious changes in prices for both WTI and Brent, with the important weekly release of EIA inventory data for Crude stockpiles in the US coming in more or less in line with expectations.  The detailed release showed a big drop in products supplied for the week, to the lowest level since early 2012, however this may be explained by the presence of the New Year holiday. Any negative effect this could have had on the demand picture for Brent seemed to be offset by a large increase in imports that was also seen. More on thfe inventory can be found in the Weekly Inventory Analysis section on the right.

WTI finally saw some definitive price action later in the week, with the grade rising 0.8% on Thursday and then dropping 0.4% on Friday. The pattern was similar to Brent but the grade increased less on Thursday and dropped by a much larger 1.2% on Friday. The driver of Thursday’s gains came from fundamental issues affecting both future supply and demand. Firstly, Chinese trade data indicated a jump in exports of 14% y/y , much higher than the 5% predicted by economists, which provided market participants with optimism that the world’s second largest economy (and second largest fuel consumer) would remain buoyant this year. Secondly it was reported in the media that Saudi Arabia, OPEC’s largest producer, was beginning to cut crude production to make up for increased production that the nation had made during 2012 to make up for outages in other regions. The cut that was reported was of 465,000 barrels a day, equivalent to a cut in production of 4.9%.

The much waited Seaway reversal and expansion (first mentioned in “The WTI-Brent Spread: narrowing in the New Year?” ) was completed on Friday, which provided negative pressure to Brent crude as the reversal increased the ease of delivery of Midwestern US crude to refiners on the Gulf coast, thereby ensuring a larger supply of the cheaper WTI alternative. Inflation data out of China added to the negative sentiment, as the higher than expected inflation number reduced the flexibility of the government to continue providing stimulus and also added to the potential for interest rates to need to be raised sooner than expected, thereby reducing expectations of future growth.

The Week Ahead

The week ahead could be an important week for WTI, as the effect of the completion of the Seaway reversal will start to be seen by traders and participants with a good familiarity of the US markets. Although it is likely the rest of us will not know these effects until the EIA data release on the 23^rd January. For now there are a number of indicators coming out this release that will likely have an effect on markets, particularly given investors will be forming opinions for which way to place their trades for the New Year.

Firstly, the monthly beige book comes out on Wednesday, with anecdotal evidence on economic indicators and their interpretation by the Fed, thereby giving investors an indication of how the Fed is to position itself before the next interest rate meeting.

Three indicators that often lead US economic growth, and therefore may impact crude, are also released this week: the Empire State manufacturing survey on Tuesday, the housing market index on Wednesday and the University of Michigan consumer sentiment survey on Friday. All three of these surveys represent different areas of the economy, the first manufacturing, the second construction and the third consumer consumption. In particular to look out for would be another negative reading in the Empire State survey, which has been falling for the past three months and tends to lead overall manufacturing in the US. The housing market index has been trending upwards since May but still remains below the 50 point mark that would indicate the whole market was expanding. Lastly the consumer sentiment index, which is often used to forecast future consumption, fell in December on fiscal cliff concerns. Participants will look out for whether the temporary fix has led to higher consumer confidence or whether concerns over the federal debt ceiling still linger.

A number of Chinese growth indicators will also be released on Friday, including industrial production and GDP. These will likely be a driver for market sentiment on the last day of the week.

Lastly one mid-week indicator that could affect crude are Treasury International Capital flows on Wednesday. This indicator indicates financial flows into US securities from abroad and therefore gives an indication of external demand for US assets and the USD. With equities and the USD correlated with crude it is likely this indicator will indirectly affect oil prices.

Weekly Inventory Analysis: EIA release of 4th January 2013

How did EIA inventories affect Crude prices this week?

This is the first weekly inventory analysis post, which will look at the effect of the industry-backed API and government-backed EIA oil inventory reports and how they've affected WTI and Brent oil prices. For background information on these releases, check my previous blog post EIA & API Crude Oil Inventories Report: An Introduction.

Both releases were two days late last week due to the New Year, with the API release coming late on Thursday night and the EIA release coming at 4:00pm GMT on Friday. This meant the releases coincided with what is considered one of the most important macroeconomic indicators of the month: US non-farm payrolls. This indicator, which details the change on employment and the unemployment rate in the world’s largest economy, is often considered a good forecast for future demand potential. For a more detailed description check this brief description at Investopedia. Because of the fact the non-farm payrolls and the EIA numbers were released on the same day, it is necessary to discuss the former first.

The non-farm payrolls number came in as positive, causing a rally in US stocks which are historically correlated with oil prices due to the fact that both have consumption as their main drivers. Hence on the non-farm payrolls release both WTI and Brent rallied for around an hour and a half, stabilizing shortly before the release of the EIA release.

The API release had reported a fall in inventories of -12 million barrels. This was significantly more than the consensus forecast of -1 million barrels from a Bloomberg survey. Hence market followers may have been surprised when the EIA release, which confirmed this large fall in inventories with   -11.1 million barrels, actually resulted in a bearish reaction from both grades.

Despite the high fall in inventories, articles such as this one from Reuters suggest the headline number may be severely biased to the downside due to accounting reasons. Essentially refiners reduce purchases in the last week of the year for tax purposes. This would likely have been coupled with cargoes being held off-shore, which could result in a larger than expected inventory increase this week or next as industry participants catch-up.

This technicality alone was not enough to cause the bearish sentiment, rather the EIA breakdown contained a number of indicators that implied demand had significantly weakened in the last week of the year; negative news for both grades. Firstly, consumption of gasoline had fallen significantly and secondly stocks of both gasoline and distillates had continued their upward trends and surpassed consensus expectations, with gasoline stocks now having risen for 6 consecutive weeks.

While WTI remained buoyed for the remainder of the day by US employment numbers, Brent faced more negative news in the form of import data. Net imports for the last week of the year fell to their lowest point since February 1996, as the first chart below shows. Even worse for imported Brent grades, the second chart shows US net imports as a % of total petroleum products supplied to the domestic market reached the lowest proportion since 1991, and even on a 4 week moving average both charts show clear accelerations of negative trends since the second half of the year, implying US infrastructure for shifting the recent boom of domestically produced WTI is indeed improving at an accelerating rate (For more detail see The WTI-Brent Spread: Narrowing in the New Year? ).

Overall the inventory results this week, in particular the fact that a large fall in inventories was coupled with a quick fall in both WTI and Brent prices, demonstrates the lesson that as always the key is in the detail. Hence, while some traders might hope to profit immediately on the news, it is always better to check the numbers in more detail or at least to wait for price trends to develop. This thought process is clear in the 1-minute graphs below (WTI is on top). Both show immediate rises on the 4:00pm mark which are soon reversed before more declines come about 10 minutes later as traders and analysts have time to form a real opinion and market sentiment forms. This sentiment continues for around 30 minutes in each case before other factors come back in to play.

Watch out for the EIA release tomorrow which could show a rebound in inventories as refiners restock after the end-of-year destock seen last week. Given the technicality regarding the headline figure, sentiment will most likely form on whether the negative trends in gasoline and distillate stocks and demand have continued, which could enhance fears regarding current political fighting over the US debt ceiling which have already seen some securities pull-back.

Weekly Crude and WTI Oil Market Summary: Negotiation of Fiscal Cliff Provides Price Boost

31^st December 2012 – 4^th January 2013

This post is a little late as I was away over the weekend.

As predicted last week, the US government did indeed come to some sort of an agreement regarding the fiscal cliff, albeit a temporary one, and this had the effect of providing positive price momentum to both WTI and Brent Crude. As recommended in my previous post "The WTI-Brent spread: narrowing in the New Year?", a wager on the WTI-Brent spread narrowing would have been profitable for the third week running, with the spread narrowing from $19.8 to $18.2. In total WTI saw total weekly gains of 3%, rising to $93.1, while Brent increased 0.8% to close at $111.3.

The Week in Detail

The risk of US politicians not finding an agreement on the fiscal cliff, in which taxes and spending cuts were due to come in to effect in 2013 without a bi-partisan political agreement, caused some players to leave the market and caused both WTI and Brent to open lower on Monday than their Friday closing prices.

Despite an agreement not being reached until the 11^th hour on the 31^st, markets rallied all afternoon in anticipation of such a deal, and momentum in both contracts continued through to the afternoon of the 2^nd of January.  Although some consolidation occurred in each grade as traders exited trades for profit, the gains remained strong with WTI gaining a total of 3% over the two days of trading while Brent rose 1.9%.

WTI continued to see positive price momentum on 3^rd January, however by the afternoon the price had reached $93.3, a rise of $3.3 since the lowest point of the 31^st, and technical indicators such as Bollinger bands suggested the security may have been overbought. It could be that a combination of these technical indicators, in conjunction with the fact that the US agreement is a mere temporary fix, was enough to persuade investors that prices had risen too high, and the price dropped back down to $91.5 before rebounding back to the $93.3 range on the 4^th on the back of positive jobs news from the US.

Brent on the other hand saw losses on both the 3^rd and 4^th, with the price falling to $111.3 at close of trading after starting on the 3^rd at $112.2. Despite positive jobs news from the US, a late release of the US EIA report showed that petroleum consumption had dropped significantly in the week ending 28^th December. Although this news should in theory be negative for both grades, bears appeared to only attack Brent rather than WTI, with possible reasons being an expansion of the Seaway Pipeline next week which should reduce the WTI supply glut in conjunction with a rising US stock market which typically correlates with the price of US oil.

The Week ahead

Despite hitting the $93.3 on the 3^rd and again on the 4^th, the price of WTI has been unable to edge through this point which has now formed as a technical resistance level. At the time of writing (2100 GMT, 1600 EST) WTI has again reached $93.3 in US trading and so this level is key to look out for those expecting a further rally. It could be that price fluctuations will continue to trade in an ever narrowing range until we get some fundamental news such as inventory data this week or political progress regarding the US debt ceiling.

It is reported in this CNN article that the debt ceiling must be raised by February 15^th at the very latest to avert a US default. However with previous debt ceiling negotiations and the fiscal cliff discussions taking until the 11^th hour, it remains to be seen how seriously markets will take this threat; as something that will inevitably be solved, or a threat to the US fiscal position that could actually do some serious damage. Whether the reversal and expansion of the Seaway Pipeline ( first discussed here ) will be enough to take WTI over the $93 level without fundamental support from a renegotiation of the debt ceiling will be seen in the next week or two. At any rate, it is likely negative news will continue to affect Brent more than WTI and the spread should continue to narrow this week. 

EIA & API Crude Oil Inventories Report: An Introduction

Followers of oil-related news may be familiar with the weekly-release of US oil inventory data. There are two different releases each week, one on a Tuesday evening (UK time 21:30) by the industry-backed American Petroleum Institute (API) and the other on Wednesday afternoon (UK time 15:30) by the government Energy Information Administration (EIA), with the latter often being viewed as the main market mover. In this post I’ll be discussing the importance of these data releases and how they affect the market.

Oil, like all commodities, is fundamentally driven by economic laws of supply and demand. Inventory data is therefore important as it provides an indication of the net position of supply minus demand and can be tracked over time. If inventories are falling over time then it is likely that either demand is increasing or supply is decreasing, and hence the price of oil is likely to increase. Tracking inventories over time also gives an indication of the extent of effects caused by one-off supply or demand disruptions. For instance if inventories have held at a steady level but then supply is disrupted by severe weather,  inventory data will give market participants an indication of the extent of the disruptions to the oil supply chain.

The EIA release can be found here. While the overall stock of crude oil is the headline number reported in inventory releases, the EIA release also provides a breakdown which covers everything from refinery usage through to imports, exports, consumption and supply for a number of different petroleum products. Because of this breakdown the EIA release does not only directly affect crude prices but also futures prices of other fuels such as gasoline.

Which report is better?

Both industry-surveys are conducted in a similar manner, but the EIA survey is government mandated while the API survey is voluntary. The EIA report will be the most useful for non-institutional investors looking for a full breakdown report as it is free to access. While the EIA report is often considered the main market mover, the API report still moves the market as it gives an early indication of what the EIA numbers are likely to be. However the surveys do often come up with different numbers, and an interesting article from the FT gives a short analysis of the differences. For interesting readers, energy commentator Geoffrey Styles posted an interesting article here about how the reports could be improved.

How does the market react to the releases?

Energy market news before the EIA release will often quote that oil is up or down based on a combination of the earlier API release and a consensus view of forecasters. A good example is this Bloomberg article from December 19^th that discusses how oil gained when the API figures showed an inventory fall of three times more than the forecasted amount (-4.1 million vs consensus of -1.75 million). Momentum from this early release will often then build throughout the morning in anticipation of the EIA report. Normally the EIA should still move the market, and in theory in a similar way to the API report; if the release shows inventories fell by more than consensus momentum may continue and the oil price will rise further. Interestingly on December 19^th the EIA report actually showed inventories dropped by 1 million barrels, a whole 3.1 million barrels less than the API report and 0.75 million less than the consensus view. Despite this, oil still saw strong positive pressure and increased by more than a dollar in 30 minutes of trading, as the chart below shows. This could be that traders simply saw the later release as confirmation that WTI inventories were at least beginning to fall, given the supply glut discussed in my previous article “The WTI-Brent Spread: narrowing in the New Year?”.

How to profit from the inventory report?

There are a number of ways in which investors can profit from the inventory reports. Clearly as the graph above shows, both the API and EIA numbers can generate strong market momentum if they deviate from the consensus view. One way to profit from the report is using short-term trades to capture the positive or negative momentum created from the deviation from consensus. If inventories actually increase more than expected it is likely oil wall fall for a short-time period after the release, and possibly for the rest of the day, and vice-versa. To test this theory, I will be providing a weekly update on release on the inventory figures to see how the markets reacted for the rest of the day after the trade – please check the “Oil inventory report analysis” section on the right for more.

Lastly the inventory number will also influence other securities such as equities and FX. A post explaining how and why this happens will be provided in the coming weeks.