Weekly WTI Crude Oil Inventory Analysis: EIA release of 27st February

Summary of last weeks’ change in Crude Inventories figures:

API: +0.9 mb

EIA Consensus:  +2.5 mb

EIA actual: +1.13mb

Markets perceived this week’s EIA report as positive, with total US crude inventories increasing by 1.4 mb less than expected. In addition to this, a number of key details in the breakdown provided support for WTI prices; both refinery input and end-product demand were positive and US domestic crude production fell slightly.

The Breakdown

While high gasoline stocks and low refinery utilisation are normal for the beginning of the year, the current patterns nevertheless spooked markets to some degree, particularly due to US consumer’s disposable income being cut in the New Year’s payroll tax rise. Fears were somewhat dissipated in this week’s release as the EIA report showed wholesale gasoline demand increased by 160, 000 b/d and refinery utilisation increased by 2.2%pts to 85.1%, with much of the increased production in gasoline.

It was not just demand side signals that were positive; supply details provided some market support 

also, with US crude production falling 22,000 b/d after 4 consecutive weeks of growth. On top of this, inventories at Cushing, the main focus point of the supply glut, fell by 75,000 barrels. Instead much of the increase in inventories came from the Gulf Coast PADD 3 region where stocks increased by 1.1 mb to 174.6 mb; such a build-up is again normal as refiners start stockpiling for spring and summer gasoline production, although this region will be the one to watch in Q2 and Q3 as new pipelines begin to move more and more crude from PADD 2 and Texas (See Seaway No Solution).

How Markets Reacted

Real-time market reaction to the release was insignificant, with WTI remaining in the $92.7-$92.8 range in the hour after the release as the graph below shows. The grade eventually ended up on the day, with further support also coming from positive US economic releases from durable goods orders and pending home sales.  

Next week’s release

If the positive US economic signs remain true, we should see gasoline production and demand both increasing next week. However such results may be hampered by the effects of the US fiscal sequestration, the coverage of which may have led some to cut back on spending, regardless of whether these cuts are prevented or not.

Brent-WTI Spread: Condensates Causing Problems

As I’ve mentioned in my previous two articles on the Brent-WTI spread (Narrowing in the New Year? and Seaway No Solution), US domestic crude production has grown rapidly over 2012 and is expected to continue increasing this year. What’s more, a large amount of this crude is ultra-light oil known as condensate. This oil is the opposite specification of the heavy crude that the majority of US gulf refiners are set up to process and so currently US condensate demand is low, and the increased storage needs alongside regular WTI crude is leading to the prices of both falling relative to Brent.

While current export laws prevent oil companies exporting condensate despite low domestic demand, Bloomberg report that some companies are now setting up so-called mini-refineries that will use a simple process to distill the condensate into separate fluids in order to meet permitted export conditions for products made from raw crude.

The mini-refiners or “splitters” should be able to process 300,000 b/d each, with the first production expected to start in 2014. On top of this this the US Commerce Department is approving more export licenses for raw-condensate to international oil companies that process the ultra-light oil in other counties, such as Valero’s refinery in Canada. With each permit granted on its own merit, such a process takes time and as Keith Shaefer of the Oil and Gas bulletin explains, condensate production is increasing at a faster rate than new agreements and refineries are established. Thus while these developments are good news for US oil prices in the long term, they’re unlikely to affect the Brent-WTI spread this year.

Those who are interested in learning more about condensates should check out RBN Energy’s three great articles on the subject; Fifty Shades Lighter – What Should Be Done With Condensates?, Fifty Shades of Condensate – Which One Did You Mean? And Fifty Shades Lighter – The Lease Condensate Export Problem.

Weekly Crude and WTI Oil Market Summary: Oil markets correct on technicals and fundamentals

18^th – 22^nd February

Both WTI and Brent experienced large falls this week, with markets taking a greater emphasis from fundamentals while a number of technical factors contributed to the sell-off. Overall Brent dropped 3.1% while WTI decreased by 2.9%. Despite a more focused emphasis on supply fundamentals, market perception of the factors affecting the Brent-WTI spread did not change, and the divergence ended the week at $21, down slightly from $21.8 at the beginning of the week.

Weekly Summary

WTI opened at $95.8 and Brent at $117.8, both $0.1 down from where they closed on Friday. The first day of the week saw low trading volumes, with US traders taking time off for President’s day. The main news on Monday was that Saudi had reduced their exports in December to a 15-month low, confirming the effects of a declining trend in crude production after it was announced earlier in the month that January production reached a 15-month low. Despite this news, or perhaps because it was just a confirmation of a known trend, both grades fell -0.3% in European trading. Having said this, with trading volumes 80% below normal levels, it’s more likely individual investors actions led to the fall in price, which may have been related to non-speculative purposes.

WTI made up for two previous falls with a 1% rise on Tuesday, while Brent maintained its price. The rise in WTI came despite no significant crude-related news events, and instead resulted from a rallying of US equities which have been strongly correlated with WTI over the past months. Such an idea was confirmed by Tim Evans of Citi, who stated “it’s likely a correlated trade flow that isn’t based on oil market analysis”. This emphasises a key point to bear in mind over 2013; true, there should be some correlated between expected growth, represented by equity prices, and oil prices – but has the correlation of the longer term trends rather than just average daily price changes resulted in an oil price that doesn’t truly reflect its fundamentals?

Indeed, on Wednesday we began to see a correction in response to the view that oil prices were becoming disconnected from reality, and WTI saw a -2.1% decline while Brent dropped -1.5%. While many cited the decline as a likely prospect in response to technical developments (Brent technical analysis and WTI technical analysis), the drops nevertheless were set off by a variety of factors including rumours that a fund was forced to liquidate its entire oil position. On top of this, the fact that Wednesday was the expiry day of the March contract meant that those long oil had to sell the front-month contract in order to roll forward to the next month, thus exerting further pressure on the spot price. Economic expectations were also at play, as the FOMC minutes showed that some monetary policy makers were beginning to feel a rolling back the intensity of the QE program was appropriate. The effect of this is not only to reduce the expected future money flows into commodities, but also to cause appreciation expectations of the USD to rise, thus reducing the attractiveness of oil in terms of both the spot market and as an investment. While some suggested the WTI sell-off could be related to US market fundamentals, an interesting point was that the Brent-WTI spread actually saw some narrowing, suggesting that market perceptions of the factors influencing the spread had not changed.

Thursdays trading contained no respite for either WTI or Brent, and former dropped -2.1% while the European grade fell -1.5%. PMI data in the euro area showed a surprise drop, pointing toward an economic contraction for Q1. Adding to European woes were negative US initial jobless claims numbers and a fall in the Phili Fed’s business activity index, which dropped for a second month. While sentiment remains US-bullish, such data emphasise that there continues to be short-term economic volatility. Trading down was also likely due to technical pressures as investors perceived the drop past support areas as signs that there could be some short-term losses as the grades corrected.

Having said this, both grades pared losses on Friday, with a positive release in the much-watched German Ifo survey making investors believe the -3.3% WTI and -4.5% Brent falls in the last two days were probably too high. The German data was the largest increase in German business sentiment in 2-years, which fuels hopes that Europe’s largest economy could continue to pull the remaining countries through this recession. Nevertheless gains were limited by a continuation of a stronger dollar; WTI increased just 0.2% while Brent increased 0.4%. USD strength was enhanced by concerns that Sunday’s Italian election will bring back to power political forces that ensured the country experienced one of the lowest average global growth rates of the last decade - such a result could reignite the euro area debt crisis. Overall WTI finished the week at £93.1, $2.8 from its close last Friday, while Brent finished at $114.1, $3.6 down.

 Week Ahead

The week ahead will likely be highly politised, with markets reacting to the Italian election on Monday and focusing on Iran nuclear negotiations that begin on Tuesday. The main US news will related to the $85 billion sequester, a collection of automatic spending cuts  that come in to effect on 1^st March unless they can be avoided by political negotiations. As recent history has shown, any agreement will likely come at the very last minute on Thursday, and so markets will likely be on tender hooks with perhaps a big move on Friday.

Data-wise, look out for Bernanke testifying in front the of Senate Banking Committee on Tuesday as well as US consumer confidence on the same day. US durable goods orders, an indication of investment, will be released on Wednesday while various Q4 GDP figures will have their second update this week. Normally these do not change a great deal. Chinese PMI data will be released early Friday morning before the US equivalent later in the day. The market typically moves in response to these, so we could see some large moves on Friday if US political negotiations go in the same direction.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 21st February

Summary of last weeks’ change in Crude Inventories figures:

API: +3 mb

EIA Consensus:  +2 mb

EIA actual: +4.14 mb

An overall bearish EIA release exacerbated an already negative sentiment in crude markets today, with oil inventories increasing 2 mb more than analysts forecasted. On top of the headline number, a second consecutive large gain in US crude production once again highlighted a market that is fundamentally oversupplied.

The Breakdown

Following last week’s 1% rise in US production, this week saw another large rise of 0.8% or 54, 000 b/d. Production now stands at the highest point since August 1992 and is experiencing its fastest growth rate in the recent uptrend, allowing for outlying events.

This large uptick in production comes at a time when seasonal demand for crude is normally low, confirmed by the fact that refiners once again reduced their crude inputs, this week by a gross rate of 170,000 b/d. This decline resulted in a utilisation rate of 82.9%, 0.9%pts down from last week. While a low rate is normal for this time of year, as shown on the chart below, the effects for crude demand and thus prices are nevertheless on the downside.

The amounts of petroleum products supplied demonstrated the reasons for low refinery utilisation, with distillate fuel oil supplied, which includes heating oil, falling by -134,000 b/d after last week’s drop of -31,000. This contrasts to the amount of gasoline supplied which has been on average flat for the last four weeks, experiencing modest fluctuations. Due to seasonal demand, gasoline supplied may not increase dramatically until the spring and summer driving seasons.

The fundamental oversupply of the market is well demonstrated by the above-average level of ‘days-supply’, representing how many days the current inventories could fuel the US economy. As the chart shows, while an increasing DS is normal for this time of year, the level and rate of increase is the last few weeks is the highest amount in the last 10 years.

On a regional level, stocks at Cushing were seen to increase by 417,000 barrels, but by the far the biggest increase is inventories was seen on the Gulf State where stocks rose by 3.469 million. Such a rise is normal for this time of year, as stocks were depleted for a mixture of both tax purposes in the run up to January as well as for use in heating fuel production. However while Gulf states are still about 2 million barrels below the point they normally reach in the summer, inventories of the Gulf Coast will likely play a high part in analysis over the coming months as various pipelines from the current supply glut in the Midwest are completed (see my previous post, Seaway No Solution, for more detail)

How Markets Reacted

Markets were already in a downward trend after losing a large amount of ground yesterday, caused by a number of factors including rumours that a hedge fund was liquidating a large position, minutes from the FOMC meeting showing that monetary authorities believe the time for QE may be coming to an end, the API report coming in as an increase in inventories and the fact that a major technical support level was breached, thus triggering sell orders.

While it might be thought that the bearish EIA report was a justification of this downward trend, the WTI graph below shows that the price actually increased slightly on release at 11am (chart in US time). Despite an increase of up to $0.60, the price eventually fell back down an hour later.

Next week’s release

While demand signs were the main focus of markets from EIA releases in the first few weeks of the year, supply concerns have truly come to the foreground since the beginning this week. Indeed if production carries on increasing at the dramatic rates seen in the last couple of weeks, the WTI-Brent differential may face further divergence as demand for the excess crude simply does not exist at this early stage in the economic recovery. Hence this could be a key concern in next week’s release.

Technical Update: Brent Crude: Hanging man indicates a correction

Brent has been on an upward trend for weeks, but has slipped in recent days after touching $199.17 on 8^th February.

As the chart below shows, technical analysis based on data from the end of the day yesterday indicated Brent could be heading for a reversal, in a similar fashion to the technical post on WTI yesterday.

Firstly, we can see a pronounced “Hanging man” formation on the 15^th, when the within-day price fell $1.7 from opening to reach a low of $116.3, before closing back at $117.7. The formation shows that while there were buyers in the markets, they did not have enough power to completely overwhelm the bearish sentiment. What’s more, a similar pattern was seen yesterday when the grade closed at $117.52, slightly up on the open, but tested the waters as low as $116.56.

In addition to these signs, the technical MACD indicator provides a bearish confirmation; as the lower section of the chart shows, the MACD line has crossed over the signal line, indicating momentum may now be entering a bearish trend.

Indeed, in trading today we have seen a large fall in oil markets, with WTI falling $2 and Brent dropping $1.9. However there have been two fundamental reasons contributed to this fall; Bloomberg suggests a hedge fund liquidating its overall position caused a large sell-off, and with the March contract expiring today a rolling over to April contracts resulted in the March price dropping further.

While there seem to be fundamental reasons for the fall seen today in both WTI and Brent, it will be interesting if the fact that these drops have confirmed the signals discussed in Brent above, and in the WTI post yesterday, will result in prices of the two grades developing as predicted, which we’ll review at the weekend.

Technical Update: WTI; Reversing from a Double Top?

WTI has been on a clear uptrend since early December, when the price of the April 2013 contract experienced a low of $86.57 before beginning its upward march, increasing to a high of $98.65 on 30^th January. Now we’re seeing a pattern formation that could mean the end to this rally; a Double Top Reversal (a good explanation of this technical indicator can be found at stockcharts.com).

As the chart shows, the peak of $98.65 has been followed by a trough with a low of $95.37 on 11^th February, before rebounding back to the previous peak and touching $98.52 on 13^th. With the last four days exhibiting a downward movement back towards the trough resistance level, we could see confirmation of the Double Top Reversal, and thus of a downward trend, if the price falls through the $95.37 level.

To give a better indication of whether the Double Top Reversal is forming, we can look at some details of the underlying volume. One of the key points is trading volumes; the price increases seen as WTI approaches the second peak should be characterised by low volume, demonstrating a lack of market interest in a further rally, while the decline from the second peak should be characterised by higher volumes as bears begin to overwhelm the remaining bulls.

Indeed, as the volume indicators on the chart below shows, if we compare one-day volume with the 25-day MA, we see there was indeed a decline in trading on the second ascent. On the other hand, while volume did pick up slightly for the first major decline on Friday, trading on Monday and Tuesday was low due to the US holiday. Therefore to see if this really is a Double Top Reversal, we’ll have to wait for developments in a couple more sessions.

WTI Price Implications

If the reversal pattern is confirmed with a break below the $95.40 support level, a common price target would be the support level minus the difference between the peak and the support. Hence WTI may fall to around $92.30 in the coming days. Having said this, WTI has gained in US trading today, and if increasing volumes are seen in conjunction with these increases then it could be that the break in the upward trend is just temporary.

WTI-Brent Oil Price Spread: Seaway No Solution

Back in December, I suggested that the Brent-WTI spread would likely narrow in the New Year due to the completion of the key Seaway pipeline as well as increases in refinery demand. Back then, the spread was at $22.6 and indeed narrowed considerably to reach $15.6 on 17^th January. Since then however, operators of the Seaway Pipeline have announced that flow has been restricted due to new bottlenecks building up at the delivery point in Texas, and markets have come to realise that not only is Seaway not the miracle cure to the inventory build-up, but that the key factor affecting the Brent-WTI spread may not be logistics, but rather overwhelming supply. In the wake of these realisations, the spread has more than reversed, closing at $21.8 on Friday as the chart shows.

The announcement from Seaway came on January 23^rd, when Enterprise announced storage at the final terminal in Jones Creek, TX, had reached full capacity and thus no more crude could flow into the terminal. The reason for this is that the terminal has just two outlets; a further pipeline to Texas City and Phillip 66’s Sweeny refinery. With the refinery under maintenance, demand from Jones Creek was reduced by up to 247,000 b/d, and the 2.6 Mb available in storage was not enough to absorb the surplus supply.

While the Brent-WTI spread widened significantly on the news, many analysts still expect a narrowing of the spread in the coming quarters because of additional infrastructure projects that are coming online. The range of these estimates varies widely; Goldman Sachs expects a spread of $7.50 in Q2, while the writers at Econblog believe $12 would be more realistic and analysts at Deutsch Bank don’t expect the spread to narrow until the second half of 2013. To understand the reasoning behind these differing forecasts, let’s take a look at some of the additional projects that will help change the current structure of the US crude market.

Pipeline from Jones Creek to ECHO

The first project should complete Seaway’s original purpose of moving crude from Cushing to a place of greater demand and greater storage capacity. Enterprise are currently in the process of building a lateral pipeline between Jones Creek and Enterprise’s crude storage terminal in Houston, called ECHO. The terminal, which currently has a storage capacity of 750,000 barrels (that will someday be 6 mbls), is connected to refiners in the Texas Gulf area with a total refining capacity of 3.8 Mb/d, as well as having water access to move crude to other refineries on the Gulf coast. Furthermore, with NYMEX considering implementing a new benchmark for US crude at the ECHO terminal, Enterprise will be doing all they can to ensure the terminal features as a major future hub no matter what the structure of the oil market. Given this, additional pipelines out of the terminal are already planned; by 2014 there should be a pipeline connecting ECHO to the 1.84 million bbls Beaumont/Port Arthur refinery complex.

Enterprise and its customers are confident this lateral connection is what the oil supply chain needs; earlier this month transporters provided the long-term commitment needed for the company to build a twin Seaway Pipeline, which is expected to increase total capacity to 950,000 b/d by 1Q2014 from the current 450,000 b/d.

While the market has had Seaway tunnel-vision in the past month, focus has also moved on to other projects expected to relieve the glut at Cushing. One of the reasons cited by Goldman Sachs’ Jeffrey Currie for his belief that the spread will fall to $7.50 is the implementation of Magellan’s Longhorn pipeline reversal, allowing an initial 75,000 b/d flow from the WTI producing Permian basin to Houston in Q1, expanding to 150,000 in Q2 and eventually 225,000 b/d.  Additionally Sunoco Logistics is also implementing a reversal of two pipelines which will take crude from the Permian basin area to the Gulf coast, with an eventual capacity of around 200,000 b/d. The combined changes  mean at least 280,000 barrels can avoid Cushing in Q2.

Another project to reduce the crude flow through Cushing is a major expansion to the Keystone pipeline, which currently runs from Canada to Cushing through an indirect route, but will soon allow a direct route from Canada to Texas and thereby providing another route for crude flows out of Cushing. On the flip-side, this will also mean much more crude in the Gulf area.

It’s not just pipelines that will transport extra production; Rail is now the preferred transportation method from oil plays in North Dakota. The total amount of crude carried on railways in the US is 350,000 b/d and the main carrier, Burlington Northern, expects the 240,000 b/d it transported in 2012 to increase by 40% this year. Much of this will be to refiners on the Gulf coast.  

While these pipelines will help reduce the glut at Cushing, they will only be effective in decreasing the Brent-WTi spread if excess crude in the Houston area can find its way to points of demand. The reversal of Shell’s Houston to Houma, LA, pipeline should also be finished by Q1/Q2. This pipeline, with a capacity of 250-350,000 b/d will allow crude to flow from Houston to the Louisiana Gulf refinery area in which there is a potential 3.2 MMb/d of refining capacity.

Will there be enough crude demand?

While there are plenty of projects that will help alleviate various bottlenecks in the oil supply chain, none of these will actually increase the price of oil if demand at the final destination is overwhelmed by the new supply. However with different refiners set up to process different types of crude, it’s not just a case of total crude supplied matching total crude demand. Indeed, with the boom in tight oil coming only recently, refiners have actually spent the last few years investing to process heavy crude rather than domestic light crude. Furthermore the country cannot just export excess light crude in return for heavy imports, as the US limits exports for political reasons. With the current administration unlikely to permit increases in outright exports before the country reaches its energy self-sufficiency targets, US produced crude prices would have to fall before the government acquires the political mandate to allow exports, or before refiners have the incentive to convert back to processing light crude.

Will the spread narrow this year?

Seaway tunnel-vision reined in the market earlier this year, and the consequences of such a view is that many have been hurt on bets on the Brent-WTI narrowing that didn’t materalise. There are now three main camps with regard to the Brent-WTI spread; those who believe the spread will narrow in Q2, those who believe it will not narrow until later this year or 2014, and those who don’t believe it will narrow at all, and that WTI pricing will be completely overwhelmed by excess supply.

Given the current outlook, it looks as if a combination of these views will prevail; a narrowing of the spread in Q2 and 2H followed by a widening again in 2014. In this process, WTI will see gains as infrastructure comes online which will result in sweet crude imports being priced out and the WTI-Brent spread will narrow. However as US production increases, storage will fill up and bottlenecks will be seen in weak points of the supply chain, which would result in the Brent and WTI again beginning to diverge. It’s likely this process will be more gradual than the rapid narrowing seen at the beginning of January, as those burnt from the reversal take more caution.

One of two things would then have to happen to prevent the wide spread remaining; a reversal of export policy or refiners switching to processing light crude. Due to the political attractiveness of energy independence, a change in export policy would have to have clear benefits for the US economy which means the administration may have to wait for prices to fall before it gains support. The same applies to the refinery conversion process; sweet crude prices need to be sustainably lower than imported heavy crude for the capital expenditure to be justified. Both of these things will take some time, and thus the spread is likely to widen further before complete price convergence between WTI and Brent is achieved.

Weekly Crude and WTI Oil Market Summary: European woes spook oil markets

11^th – 15^th February

A combination of an early-week price correction and euro-area economic woes meant Brent failed to get near the $120 mark that was thrown about at the end of last week. Rather, the grade experienced its first weekly loss in five weeks, falling 1% to close on Friday at $117.7. While WTI prices increased 0.2%, gains were significantly pared by economic factors as well as a bearish EIA release that showed a large rise in US crude production. Despite this, the Brent-WTI spread fell by $1.4 from the previous week’s close to reach $21.8.

Weekly Summary

Brent gapped down by $1.1 to open on Monday at $117.8. The grade continued to fall -0.5% on the day, despite possible risk related pressure increasing after Iran’s president Ahmadinejad said on Sunday that the country would not stop its nuclear development despite sanctions. The fall in Brent looks to have been a price correction, with the upcoming $120 mark representing a significant line of resistance that some investors are not certain Brent will break through. WTI meanwhile experienced a solid 1.3% increase on the day to finish at $97, despite at one point falling from the $95.8 open to $95. While continued positive sentiment from last Friday may have been a factor in the increase, with no significant market news herd mentality may have been at play after Goldman’s Jeffrey Currie reiterated the belief that the Brent-WTI spread would narrow to $7.50 in Q2. Thus with some speculating that Brent could increase up to $130 this year, WTI would have a lot of catching up to do. Historically however, the global head of commodities at Goldman has been notoriously bad at forecasting spreads as Econmatters reports.

Both the EIA and OPEC increased their forecasts for 2013 global oil demand on Tuesday, with the resulting positive sentiment leading to gains in WTI of 0.6% and of 0.4% in Brent. Despite rising demand, OPEC’s forecasts still indicate a surplus OPEC-production of 540,000 b/d, indicating the cartel’s main producer Saudi Arabia may continue to reduce production over the coming months. These positive demand signals were somewhat supported by further risk awareness, with North Korea reminding the world of its nuclear capability in an underground test. The late-night release of the API American crude inventories showed stocks had fallen -2.3 MB, which provided some support to end-of-day US trading.

Wednesday’s trading started off on a negative note as the International Energy Agency contrasted the previous day’s demand forecasts with a bearish release. While negative sentiment from this release was offset by a positive euro-area industrial production release, showing the highest growth since August, a bearish EIA inventory release resulted in an overall negative day for WTI. The breakdown, which showed US domestic production accelerating, led to further fears of supply gluts in the country and WTI fell -0.6% on the news. The more internationally traded Brent managed a 0.2% rise.  For more on the EIA release check-out my previous post: Weekly WTI Crude Oil Inventory Analysis.

Trading on Thursday also started with bearish tones, with downbeat GDP numbers for the euro area at -0.6% q/q showing the worst decline since 2009. While markets are used to negative sentiment originating from the euro-area, the fact that France and in particular Germany fared worse than expected was particularly bad news. Growth data from Japan also came out as negative, although the fact that this helps justify the country’s current monetary stimulus may in fact benefit prices in a similar counter-intuitive nature seen in the past years in the US. Despite the negative European news, a combination of positive jobs news in the US and a lack of progress in intentional talks in Tehran provided a cushion for prices, and at close of trading WTI and Brent were both up 0.1%.

A variety of negative economic news combined to result in price falls for both grades on Friday, with a fall in euro area exports further confounding negative sentiment from the GDP release, while in the US industrial production also fell. Equities, of which oil at the moment is closely correlated, also suffered as internal communications from Wal-Mart showed a big hit to retail sales in February, prompting fears that consumption has been badly hit by increased payroll taxes. WTI was hit hardest by the news, falling -1.4% to close at $95.9, while Brent ended the day -0.3% down at $117.7.

Week Ahead

Signs were finally seen that Brent may not be on a unstoppable upward trend this week, but it remains to be seen whether the drop in prices represents a peak, or whether it is simply a short-term technical retracement. While the risk premium plays a large part in the Brent price, an absence of any major geopolitical events means a breach above $120 will only come if economic data exceeds expectations this week.

China announced yesterday a slowing of the growth rate of retail sales for last week, but this has been put down to a government crackdown on corruption and indeed the main loss of sales was seen in hospitality industry, with goods consumption growing significantly. This may provide positive momentum for oil at the Monday open in Europe, while US markets will be closed for President’s day. If such momentum does appear, then WTI would increase substantially before Tuesday’s close providing the release of the US housing index at 10:00 ET shows a continuation of the upward trend that stalled last month; so far the consensus in markets is that this will indeed happen. 

Weekly WTI Crude Oil Inventory Analysis: EIA release of 13th February

Summary of last weeks’ change in Crude Inventories figures:

API: -2.3 mb

EIA Consensus:  +2.2 mb

EIA actual: +0.56 mb

A rise in US crude stocks of 0.56 mb combined with an increase in domestic crude production was interpreted as a bearish sign for US crude, and WTI fell in todays’ trading. Brent however rebounded from initial losses on increased forecasts for global crude demand for the International Energy Agency.

The Breakdown

After two weeks of US domestic crude production remaining almost flat, a rise of 1% this week was the main focus of the report as daily production breached the previous highpoint in the upward trend that has been increasing almost uninterrupted since September , all in all production now stands at the highest point since December 1992, as shown below.

Further negative signs for crude came from a further drop in refinery utilisation and crude inputs, with the utilisation rate falling 0.4%pts to 83.8% and input falling by -121,000 b/d. Although refiner demand was weak, products supplied to wholesales saw considerable growth of 996,000 b/d, representing an increase of 5.5%. While there was a modest fall in gasoline supplied of 0.1%, distillates supplied saw an increase of 8.7% and “other oils”, representing a variety of industrial products and feedstocks , jumped 22.8%, although the series is particularly volatile.

Despite the modest drop in gasoline products supplied, the reduction in refinery utilisation led to a fall in gasoline stocks by 803,000 barrels/-0.2%.  As the graph below shows, stocks are traditionally high at this time of year but may now have plateaued. This would be a good sign for future refinery demand as gasoline producers try to maintain lower stocks in order to maintain a higher profit margin.

Crude imports carried on declining in a trend that we should continue to see as sweet crude imports are replaced with domestically produced grades, providing logistical capacity increases (look out for a post this weekend discussing this point further).  On this point, despite the overall increase in crude stocks, the regional breakdown showed crude at Cushing dropped 1.1 Mb to 50.2 MB, with the rise in stocks coming from the PADD 3, 4 & 5 regions (Cushing is in Padd 2), showing crude has indeed been flowing to key refinery regions.

How Markets Reacted

Despite markets being focused on Cushing inventories in the last few weeks, there has been some debate as to whether a fall in the glut at Cushing will enable more US crude to be processed or whether gluts will simply develop elsewhere. This thinking may have been behind the fact that despite inventories at Cushing decreasing, markets did not react positively because of the belief refiners will reduce the price they pay for crude due to the build-up of stocks in those areas. What’s more, with US production resuming its upward trend, increasing levels of refinery and pipeline capacity will be needed to process ever more crude.

Indeed, because of this perception, WTI fell by around $0.50 in the half hour following the release, and was unable to rebound throughout the day, instead declining further after the end of UK trading.

Brent meanwhile managed to rebound from its fall, making up losses experienced in the period following trading to end the day $0.13 up on the back of momentum developed from higher global demand forecasts from the IEA.

Next week’s release

Breakdowns from the EIA report are particularly volatile due to the nature of the industry, but trends can be seen particularly in US production as the chart above showed. With markets shifting focus from the Cushing tunnel-vision that characterised the last few weeks, next week’s focus will likely be on production numbers again, with analysts also looking to see how stocks in key refining regions develop, with higher stocks likely to prices for WTI fall regardless of developments elsewhere.

Weekly Crude and WTI Oil Market Summary: Brent-WTI premium back to November levels

4^th – 8^th February

WTI suffered this week as the Brent-WTI premium widened significantly to $23.2. The US blend, which fell -2.1% from its previous weekly close, suffered as traders continued to speculate as to the time frame in which WTI delivery to refiners would finally be free from constraints. Brent meanwhile came under pressure from improving economic fundamentals as well as a Goldman Sachs warning that prices were likely to be higher than forecasts this quarter. The grade finished the week at $118.9, 1.8% higher than its previous weekly close.

Weekly Summary

Monday started negatively for both Brent and WTI, with the former gapping down $0.4 to $116.4 and the latter gaping down $0.2 to $97.6. This negative sentiment gained momentum throughout the day due on economic news, with reports from France’s El Pais newspaper claiming the ruling Spanish party had received unauthorised funds, thus adding more uncertainty in the much beleaguered European country and thus the euro zone. Elsewhere news from Iran’s foreign minister stating that Iran would consider bilateral negotiations over Iran’s nuclear program resulted in a drop in risk premium in prices. While Brent fell -0.7%, WTI was hit hardest in line with declining US equities, although some of this drop could have been in response to overbought technical indicators on the back of last week’s strong gains.

Oil rebounded on Tuesday as economic indicators for service sector activity in both the US and Europe came in as positive. Given Monday’s negative European sentiment, the news was particular welcome and provided strength to the euro which appreciated versus the USD, thereby making oil more attractive to European buyers. Brent continued to outpace WTI as traders awaited the results of the API industry report on crude stocks, with the North Sea grade gaining 0.9% versus 0.6% for WTI. This price differential resulted in the Brent-WTI premium topping $20 for the first time this year, ending the UK trading day at $20.1, but dropping below the $20 mark in the US after the API survey showed stocks at Cushing fell to the lowest point this year.

Trading on the day of the weekly EIA oil report resulted in little change in WTI while Brent increased 0.2%. As the breakdown in my weekly EIA analysis explains, a decline in stocks at Cushing was enough to offset an overall increase in inventories and negative demand signs in breakdown of the EIA report. Brent may have seen some upward pressure from a tightening of sanctions on Iran, while negative effects from a slight USD appreciation would have offset positive effect from a slight rise in USD equities.

The Brent-WTI premium carried on rising on Thursday as media outlets reported that work on one of the crude processing units at BP’s Whiting, Indiana refinery would not be ready until July, 3 months later than expected. The consequences of this 260,000 barrel a day unit not being available means stocks in Cushing will be under even further pressure than previously thought, and the WTI price fell -1%. Adding to the spread differential were two main points of news out of the Middle East; firstly a Gulf official stated output there had fallen to its lowest level since May 2011 at 9.05 mb/d, and secondly the Iranian Supreme Leader stated that the country would be unwilling to take part in the bilateral negotiations with the USA that had seemed possible earlier on in the week. While the former affected oil market fundamentals, the latter also added to the risk premium, and Brent rose 0.3%. The fact that Saudi production has continued to fall to new lows shows signs Saudi is intent on keeping the oil price high, and so many analysts may raise their annual Brent price forecasts.

Trade data showing 25% y/y export growth came out of China early Friday morning, while the breakdown showed crude inputs had risen to the highest level in 8 months. Positive momentum for Brent followed and the grade maintained its velocity throughout the day, increasing 1.2% to close at a 9 month high of $118.9. Added to the upward pressure was a release by Goldman Sachs predicting oil markets would remain tight in Q1 and prices were likely to be above forecasts; such releases from the banking giant usually create a trend, and a notable point of the release was their view that the price had increased purely on fundamentals rather than incorporating a further risk premium. Trading sentiment for the US crude remained negative, and WTI failed to be boosted by the momentum affecting Brent and the grade fell 0.1% to close at $95.7. While some positive was taken by data showing increasing US crude exports last month, the Brent-WTI spread nevertheless rose by a further $1.5, closing the week at $23.2, a level not seen since 22^nd November.

Week Ahead

As predicted in last week’s weekly summary, WTI prices did indeed fall this week, although the extent of the Brent-WTI spread widening has been massive due to a resounding week for crude prices. The Brent-WTI spread has now increased every day for 8 days, since the announcement of capacity restrictions on the Brent-WTI spread. I’ll be addressing this issues again in another post later today, to give a more detailed insight on how the spread could develop over the coming months.

Brent prices are particularly elevated at the moment, and for now the most important things to look out for this week will be further news regarding Iran, further data showing economic fundamentals improving and signs regarding inventories at Cushing. If Cushing inventories decrease, we should see WTI rebounding to some extent, but lack of significant positive news would result in Brent retracing after its huge momentum on Friday. Overall we could see a slight decrease in the prices of both grades this week.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 6th February

Summary of last weeks’ change in Crude Inventories figures:

API: +3.6 mb

EIA Consensus:  +3 mb (Platts)

EIA actual: +2.6 mb

A fall in inventories at Cushing was the highlight of this week’s EIA report, with stocks falling by 315,000 barrels at the Oklahoma terminal. Despite rising crude stocks nationwide and a report that contained a number of negative factors, crude was nevertheless mainly buoyed by this positive regional highlight and both WTI and Brent prices increased in the hours after the release.

The Breakdown

Refinery activity remained subdued last week, with utilisation rates falling -0.8%pts to 84.2% and gross crude inputs decreasing by -132,000 b/d. While utilisation rates are typically low this time of year due to seasonal maintenance, the numbers are nevertheless negative for short-term crude demand.

Total petroleum products supplied to the market saw a large fall of 629,000 b/d (-3.4%), but this was mostly attributed to propane and “other oils” (see EIA for definitions). The more commonly followed gasoline, which accounts for approximately 47% of total petroleum products supplied, saw a more modest decrease of -86,000 b/d (-1%), although this nevertheless was bad news considering the current large stocks of gasoline held. Indeed, inventories of gasoline increased by a further 1.738 mb last week, with the decreasing trend in stocks from the previous two weeks unable to be maintained.

Some respite came from a decrease in imports by 499,000 b/d in conjunction with another week in which US crude production remained fairly stable, increasing by just 4,000 b/d. The most positive sign for US crude prices came from stocks at Cushing, which declined by 315,000 barrels to reach a one-month low. This was despite news last week that the Seaway pipeline from Cushing to Texas had not been operating at full capacity due to bottlenecks in the system. Media reports that this drop in inventories could therefore have been due to buyers now using rail to transport crude, and companies such as PBF Energy have been increasing rail capacity at its refineries, as reported by Bloomberg.

How Markets Reacted

Both grades were on slightly negative trajectories in the short period up to the EIA release, with WTI facing a steeper downward trend then Brent in anticipation of further increases in inventories. Although such an increase did materialise, the fact that stocks at Cushing actually fell last week demonstrated that the negative market reaction to last week’s news Seaway pipeline capacity news may have been too strong, and WTI in particular rebounded.

The April contract for WTI was priced around $92.10 around 15:30 on Wednesday, and after the release began an upwards trend that resulted in an increase of about $0.70 in the following half an hour, with the grade reaching $97.30 before it started to retrace as traders took profits.

Brent struggled to trade convincingly in either direction in the first 10 minutes after the release, but soon began an upward trend in line with WTI. In total the grade managed a gain of around $1 before also retracing around 17:00 GMT.

Next week’s release

In previous weeks we have seen demand side signals from products supplied and refinery inputs overshadow large build-ups in inventories, with much of the inventory build-up deemed to be down to seasonal factors. Following this logic we may have expected a fall in oil this week as product demand and refinery input declined, but instead market sentiment seemed to be focused on signs that inventories at Cushing had decreased to a one month low. Having said this, US equities were also experiencing a positive day which may have explained some of the gain in oil. The key therefore to look out next week will be how inventories at Cushing have developed now rail is beginning to play a key factor, and if overwhelming supply can  once again be overshadowed by positive signs that this supply is at least making it to customers.

Brent and WTI crude oil price forecasts: 2013 Summary and Projections

Whether you are a short-term trader or long term investor, it’s good to have an idea of where markets could be heading and what events will be the key drivers of market change. Hence in this article I’ll be looking at the possible determinants of oil prices in the remaining 11 months of 2013 and take a look to see where analysts are predicting oil prices will head over the year.

Current Forecasts

Analysts generally forecast prices a couple of years out, but given the large number of unpredictable events that affect macroeconomics and politics, these forecasts often change. The table below demonstrates these changes, showing that forecasts of the 2013 Brent price by analysts polled by Reuters fluctuated up and down over the second half of the year, with the average prediction now standing at $109.7, $3.70 down from the current price of $113.50. Given this is an annual projection, it means most analysts predict prices will fall below $109.7 at some point.

	Mean forecast
Aug-12	$107.2
Sep-12	$106.9
Oct-12	$108.8
Nov-12	$107.5
Dec-12	$108.0
Jan-13	$109.7

What should you make of these forecasts, and how have they been formed? Given the average yearly price is forecast to be less than the current prices, let’s begin with a look at what could cause a fall in Brent and WTI prices.

Booming US production

EIA data show US oil production has been accelerating a record rate, and the increase in production last year outstripped the growth in pipeline capacity, causing the much talked about supply glut at Cushing, Ok and leading to the capacity upgrade and reversal of a pipeline that previously flowed into Cushing. As the graph below shows, production has increased from around 5 mbd to 7 mbd in the last 5 years, with the majority of this growth coming in 2012, when production increased around 14% y/y from Jan-Nov compared to 2011. With EIA expecting US production to continue to grow by another 0.9 mb/d in 2013 (Table 1, an increase of 14%) we could see downward pressure on WTI due to increased supply as well as downward pressure on Brent due to decreased US demand for imports. Such developments are already being noticed; last week Hess announced a closing of a New Jersey refinery that still relied on Brent imports due to increased costs of the North Sea blend versus the WTI blend, which should reduce import demand. This is combined with the fact we have already seen US crude oil imports decreasing in the last few months. Furthermore, in an announcement last week Seaway pipeline operators Enterprise confirmed that the increased capacity was unable to be utilized to full effect due to new bottlenecks in supply in Texas, with these not expected to be alleviated until 2H2013. Thus if increased US production does arise then a lot of this is unlikely to be able to reach refineries and thus increased storage costs will weigh on the price

Other non-OPEC production is expected to rise

The EIA also expects large gains in crude production in other non-OPEC countries, with the agency forecasting total non-OPEC crude and liquid fuels supplies to rise by 1.42 mb/d to 53.89 in 2013. Accounting for the US, this means there should be growth of around 0.5 mb/d a day in other non-OPEC countries, with potential sources of growth including South Sudan, Brazil and Kazakhstan. South Sudan would be the area where supplies could come on-line the soonest, with the current lack of supply a result of a dispute between South Sudan and Sudan over how much the Southern country should have to pay to transport oil through pipelines in the North. If solutions are found and production reaches the pre-shutdown rate there would be an extra 350,000 bd on the market.  Elsewhere, Kazakhstan’s new oilfield Kashagan is expected to reach 150,000 bd by the middle of the year. However as the FT reports, projects in Kazakstahn have been beset with problems and even reaching 150,000 bd would be a success at this stage.

In September the EIA suggested Brazil’s output could grow by up to 200,000 b/d in 2013 due to its offshore, pre-salt fields which could contain reserves equal to those found in the North Sea. Production growth has been slow however due to strict legislation by the Brazilian government aimed at ensuring Brazil gets its fair share of the profits. This included the halting of production & exploration licenses in 2008, resulting in foreign companies having to take the slow process of merging with companies already in possession of licenses in order to gain opportunities for growth. A long awaited auction is now scheduled for May and could result in further Brazilian developments in the second half of 2013, although these issues demonstrate that there may not be considerable Brazilian growth this year.

Upside Risks

While increased production remains the significant downside risk for crude prices, there are a number of factors that could result in crude prices continuing to rise after already increasing in January. These include:

A higher risk premium from geopolitical tensions

The current risk-premium priced into Brent is believed to be between $10-$20. While this premium could rise or fall, there are a number of issues concerning the Middle East and Africa that could add a further premium; this article at oilprice.com provides a narrow summary. This list is not exhaustive however, and a potentially huge problem would be a further breakdown in relations between the Kurdish regional government and the Iraqi central government over long-running tensions that have been further fueled by the regional government signing independent contracts with international oil companies, eager to secure additional supply in the face of high prices. Currently the central government is threatening to withdraw fiscal payments to the area, and readers who want to learn more on this issues should see this Time article as a great starting point, as well as this article at Foreign Policy in Focus for further information.

At the top of the risk-premium agenda will be continued issues between Iran and the Western international community, with current sanctions against Iran reducing exports from 2.2 to 1.4 mb/d according to Reuters. There has been much speculation that military action by Israel against nuclear facilities could be possible, and one of Iran’s main tactical advantages is controlling the Strait of Hormuz, which carries 17.5 mbd of oil supplies from the Middle East to Europe and beyond. While other avenues for crude out of the region exist and are being developed further, the current situation has resulted in Iran threatening to close the Strait in the event of military intervention, and US threatening intervention only if Iran closes the Strait. The problem here would be antagonistic action by other countries such as Israel in the belief that this would push the US to get involved. Today the country did announce it will be meeting directly with the US on February 25^th, so this is the next date to look out for.

Saudi Arabia will cut production

With many members of OPEC counting on oil revenues to fund their budgets, the cartel has tended to keep a minimum Brent price floor. For the first half of 2012 this was thought to be $100, however at a June meeting OPEC communicated that this could comfortably rise to $110 without damaging global growth, and reaffirmed this at the latest meeting in December . While the cartel confirmed that it would maintain a production ceiling of 30 mb/d, about 1 mb/d above its production at the time, the group also said it believed demand for its oil would fall to 29.7 mb/d in 2013 and data released in early January show Saudi Arabia had actually already began reducing their output in December. Although there have been suggestions that this could just be due to seasonal demand issues.

Economic growth in the US and China will accelerate

The effect of macroeconomic expectations for the USA on oil prices was demonstrated over the New Years when politicians voted to avert the so-called fiscal cliff on December 31^st, resulting in the WTI price increasing 3% over the two days of trading on 31^st December and 2^nd January. Given that the last few weeks have seen a number of economic indicators and corporate earnings in both the US and China come in better than expected, many market commentators are now suggesting this could finally be a return to something like pre-crisis growth levels, and thus oil prices would come under further pressure from increased demand.

Oil will increase in line with US equities

This point relates indirectly to above, but argues that potential negative supply factors will be overwhelmed by oils increasing position as an investment asset. As the EIA reports here, correlations between oil and other factors have become increasingly stronger. In particular, since 2008 oil has shown an increasing correlation with US equities and inflation expectations as well as a negative correlation with the USD. Some believe this is because oil is increasingly being seen as an investment asset; hence if equities are rising on economic expectations then oil demand is expected to increase and investment in oil contracts increase too. A negative correlation is seen with the USD as a weaker dollar makes oil cheaper for non-US investors, as well as raising inflation expectations in the US which causes investors there to seek assets that will increase with inflation such as commodities.

Summary and Forecast

With the announcement last week that the Seaway Pipeline has not been able to operate effectively due to storage capacity constraints, I do not see how WTI prices can continue to increase in the first half of the year, particularly if US production does grow as much as analysts are expecting. While I expect prices to rise in the second half of the year on the back of growth and the completion of further storage infrastructure, I nevertheless expect a slight decrease in the average WTI price from what it is now, to somewhere in the $90-$95 range.

For Brent the situation is a bit more tricky. If the geopolitical risk premium remained the same, I would expect at least that the Brent price would not fall much from its current level as global growth offsets some increase in supply, which would also be balanced out by less Saudi production. Having said that, it’s highly unlikely that the risk premium will not change when we have upcoming events in February regarding Iran to look out for. My view would be that the price could fall if these issues look positive, resulting in an average 2013 Brent price of $110 - $115.

Lastly it’s important to remember that prices of any asset class or commodity are difficult to forecast, with oil notably difficult due to the myriad of events that can affect both demand and supply. For an interesting article on how analyst’s forecasts have performed historically, check out this article at risk.net.

Weekly Inventory Analysis: EIA release of 30th January

Summary of last weeks’ change in Crude Inventories figures:

API: +4.2 mb

EIA Consensus:  +2.5 mb

EIA actual: +5.9 mb

Brent and Crude traded choppily last Wednesday on the back of an EIA release that saw crude inventories rise +3.4 mb above the expected number. Despite positive signs from refiners and consumers, the continuing rises in inventories in the US and in particular Cushing show that supply factors may be beginning to dominate once more.

The Breakdown

After the previous release showed a massive drop in refinery utilisation, it was a relief to see the gauge increase 1.4%ppts to 85% this week, with refinery inputs also increasing by 275,000 b/d after last week’s large fall. While the long term average utilisation rate is around 88.7%, it is normal to see lower rates at this time of the year.

Further positive signs were seen from a second consecutive fall in gasoline stocks as well as a fall in distillate stocks, which when combined with further increases in the demand figures for these two types of product points to signs that refinery utilisation and thus crude demand could continue to increase in next week’s release. 

Despite these positive signs, negative indications came from a rise in net imports and the fact that day’s inventory cover seemed to be ticking up at a faster rate than normal for this time of year: Net imports increased by 338,000 b/d, more than making up for the fall seen last week, while day’s supply, which measures how many days of crude demand current inventories could cover for, reached 25 days last week. This measure is typically cyclical as the chart below shows; however the black line indicates cover appears to be increasing sooner than usual, which demonstrates the extent to which supply is overwhelming demand at the moment.

Finally, despite these signs of overwhelming supply there was some consolation from that fact that US production remained roughly flat for the second week running, with production increasing just 4,000 b/d.

How Markets Reacted

Wednesday was a significant news day for crude, with both US GDP and a Federal Reserve meeting scheduled as well as continuing concerns of geopolitical events in the Middle East rearing their head. Under this backdrop, trading was choppy for the whole day but news outlets suggest an underlying negative sentiment from the inventories release despite the fact that prices for both grades increased.

WTI was priced around $98 at 15:30 on Wednesday, and as the graph below shows the bulls and bears fought for control of the market as the grade rose, slipped and then rose again so that by 16:00 it had actually increased to around $98.1 despite the negative headline number.

Brent saw similar action as the chart below shows, increasing by around $0.3 from around $113.3, before falling back down and then rising again. While Brent then seemed to increase slightly, this could be put down to geopolitical issues as news was released that French forces had hit a weapons convoy in Syria at a similar time on Wednesday (see Weekly Oil Summary).

This week’s release

The fact that this summary is a little late allows me to include reference to news late last week that it has been confirmed that the Seaway Pipeline has not been as effective as suggested at alleviating the WTI glut seen in Cushing. While some extra capacity on the pipeline has been used, we are now in the situation where one of the exit points at Jones Creek, TX has reached its storage capacity (see Weekly Oil Summary), and the pipeline has thus not been able to operate at the increased throughput of 400,000 bd. While WTI decreased 0.5% on this news, further negative news regarding inventories this week could see a much stronger reaction from the WTI price. While demand signs will continue to be a key focus for Brent, we could see a further disconnection between the two grades if inventories at Cushing are indeed seen to be increasing further, particular if US crude production begins another upward trend.

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

28^th January – 1^th February

Weekly Summary

Continued signs of macroeconomic recovery in the US on Monday provided a continuation of momentum from last week, and WTI and Brent both saw gains. Brent, which had opened at $113.3, increased 0.2% while WTI rose 0.5% from its opening price of $95.9. Positive data came from signs of increased business orders, a proxy for investment, although gains were pared by signs that pending house sales had fallen. News that integrated oil company Hess was to close its last refinery in the US, located in New Jersey, also boosted gasoline prices which led to rises in WTI. As this article reports, such refiners are unable to access much of the domestically produced oil due to their location away from key pipelines and therefore have still been relying on the more expensive Brent-indexed imports to produce gasoline. Unable to compete on costs, the refinery has closed and there is an expectation that more WTI- produced gasoline will be required to meet the lost supply. There was also a slight rise in the risk premium after further terror attacks against an Algerian pipeline as well as reports out of Iran on Saturday stating the government would give military support to Syria against any Western intervention there.

Positive economic momentum continued on Tuesday, with US house price data showing a tenth month of rising house prices which led to significant gains in US equities and an improving perception of future oil consumption demand. The situation in Europe was also given a boost by the first rise in German consumer confidence in four months. On this positive news Brent increased 0.8% while WTI gained 1.1%, with the WTI-Brent spread narrowing by $0.2 to $16.8.

Despite US GDP coming in at a surprise negative -0.1% and EIA inventories increasing more than expected, both grades gained on the day in the face of improving sentiment in Europe, increased political risk in the Middle East and as the dollar weakened after the monthly Fed meeting.  Markets reacted negatively to news that crude inventories had risen +5.9 mb versus a consensus of +2.5 mb, but oil soon pared losses as the Fed announced a continuation of asset purchases, which led to a weakening of the dollar and thus an increase in the attractiveness of oil for those outside of the US. This was reinforced by a French news report that Israel had attacked a Syrian weapons convoy, thus creating the possibility of retaliation attacks against Western-backed targets.

Thursday saw what was almost a delayed reaction to the Wednesday EIA inventories report, which in conjunction with an announcement from Seaway Pipeline operator Enterprise, led to WTI falling -0.5%. The pipeline is facing trouble because despite increasing the pipeline capacity, the glut has now built to such an extent at the end of the line at Jones Creek that pipeline through-put has had to be curtailed as there is no spare storage capacity. Although this has been affected by a temporary closure of a refinery in the area, it shows just how high supply is that even temporary scheduled maintenance is having a large effect on the ability of companies to shift crude. 

Despite news that a new pipeline and storage facilities will come on during the year, it appeared some traders were closing out of position that were set up to bet on the spread narrowing. Closing out of such a long-WTI, short Brent Position, would put negative pressure on WTI and positive pressure on the Brent price. As such, WTI fell -0.5% and Brent increased 0.6%.

Friday saw positive news from the US from an increase in the US non-farm payrolls number. While WTI increased 0.2%, Brent saw a higher rise 0.9% on further geopolitical issues coming from a suicide attack at the US embassy in the Turkish capital of Ankarra. Reuters also cited further exits of the WTI-Brent spread trades as reason for Brent rising further than the US blend, as traders had time to further consider the implications of pipeline news on Thursday. On this the WTI-Brent spread widened further and closed the week at $19, having increased by $2 in two days, with WTI at $97.8 and Brent at $116.8.

Week Ahead: WTI to fall?

The big news last week was certainly the fact that the Seaway Pipeline will be nowhere near as effective as thought in reducing the glut of WTI supply. We saw the spread at around $19 at the beginning of January, just before the increased capacity came in to place. The spread has already returned to this point, closing at $19 on Friday. However it’s important to note that WTI is at a price of $97.8 now versus about $92 at the beginning of the year. Although there has been an increased risk premium, the more the WTI glut builds up the less the risk premium will be reflected in the WTI price as the majority of the product will just not be moveable, and will instead be subject to increased costs from higher demand for storage. Although the macroeconomic signs are strong, supply fundamentals have to overcome sentiment at some point, and I would expect to see deterioration in the WTI price this week, which would be the first fall in 9 weeks. A point of great interest would be if this fall is combined with a rise in the Brent risk premium dependent on geopolitical issues this week, which would imply a widening of the WTI-Brent spread.