31st December 2012 – 4th 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 11th
hour on the 31st, markets rallied all afternoon in anticipation of
such a deal, and momentum in both contracts continued through to the afternoon
of the 2nd 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 3rd
January, however by the afternoon the price had reached $93.3, a rise of $3.3
since the lowest point of the 31st, 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 4th on the back of
positive jobs news from the US.
Brent on the other hand saw losses on both the 3rd
and 4th, with the price falling to $111.3 at close of trading after
starting on the 3rd 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 28th 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 3rd and again on
the 4th, 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 15th at the very latest to avert a US default. However with
previous debt ceiling negotiations and the fiscal cliff discussions taking until
the 11th 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.
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