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.