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.