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.