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.