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.