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.