Weekly Crude and WTI Oil Market Summary: Brent-WTI premium reaches cyclical low

Both grades rallied strongly this week, with WTI gaining 3.7% and Brent 2.1%, as fears over a euro zone exit for Cyprus were overcome and economic data from the US was positive. Oil’s positions as an investment asset benefitted strongly from the S&P 500 reaching a record level, and a midweek EIA report showed positive signs for crude demand. This increased demand and signs inventories were shifting to the Gulf Coast resulted in the Brent-WTI premium ending the week at its lowest level since July.

Weekly Summary

Monday saw both grades rise on the day, with Brent increasing 0.4% from its $107.8 open and WTI 1% from its open of $93.9. The main cause of the gains was Cyprus meeting its deadline to secure an international bailout, with the policy shifting from a blanket tax on all depositors to one that will affect only those with a high level of deposits. Gains from the news were pared however when the Dutch Finance Minister Dijsselbloem suggested that so-called “bail-ins”, where the investors take losses rather than an external source, ie. the government, providing support, will be the new normal. This announcement spooked some investors who in turn moved funds from euro into USD, prompting a rise in the American currency and stalling oil’s gains further. Brent may have also received some support from an announcement by the Iraqi oil minister that despite the country’s progress in oil production, targets for 4.5 mb/d output for this year still may not be met due to absence of bureaucratic and political infrastructure.

The strongest day of the week for oil was seen on Tuesday, with WTI gaining 1.7% and Brent 1.2%. While momentum from the Cyprus deal continued, analysts also suggested physical flows were behind much of the increase for WTI, with refiners buying more crude in order to begin the gasoline production for the summer season. Economic indicators also provided support for the rally, with a gain in the US new home sales and prices as well as an increase in goods orders buoying markets. While the orders showed a decrease in those relating to capital spending, often used as proxy for business investment, this followed last month’s large gain and so most were unfazed by the news. The strength of both indicators shows the financial confidence of the US consumer is increasing.

The EIA report on Wednesday provided further support to the idea that refinery production was increasing, and thus that demand for both US-produced WTI should continue heating up over the coming weeks. Further details can be found in my weekly inventory post. The news was positive and WTI rose 0.5% and Brent 0.3%, but gains were pared as a euro zone consumer confidence report fell and the USD strengthened against its peers.

Weaker economic data on Thursday, with unemployment insurance claims up, might normally have led to falls in crude, but the process of the S&P 500 rising to its highest ever close supported markets throughout the day. Hence the week’s daily gains for WTI crude showed no signs of wavering on the last day of trading before the Good Friday close, with the US blend up 0.5% to close the week at $97.2. Brent meanwhile see-sawed in daily trading, with the reopening of Cyprus banks much reported and traders unlikely to take on any large positions before markets reopen in London on Tuesday. The grade eventually closed 0.1% up to end the week at $110. The strength divergence between the two grades resulted in the Brent-WTI premium closing below $13 for the first time since early July 2012.

Week Ahead

Data-wise, Friday sees the month’s most watched indicator, the US non-farm payrolls released. The weekly unemployment insurance claims data has been strong, and so a strong non-farm payrolls number is forecast by economists, who expect a 193,000 gain. Manufacturing surveys for China and US come out on Monday, and will dictate momentum early in the week. The Chinese index, which is only just in expansionary territory at 50.1, is forecast for a large gain of 1pt. Meanwhile the US index is currently well in the expansion region at 54.2, although is expected to fall slightly on the week. Given current US optimism, any lack of a serious fall should be met well by markets while a buoyant China number would definitely spur markets on for the US open. European markets remain closed until Tuesday.

Later on in the week, various central banks including the euro zone, UK and Japan meet to discuss monetary policy. Policy watchers will be keen to see euro zone comments after the Cyprus crisis, and Japan should continue to give an open outlook to monetary expansion.

While there are plenty of data and events out this week that could buoy markets, oil may take a hit if the S&P reverses from its record close on Thursday. Given the rise in the S&P was characterise by smaller and smaller gains in the run-up, there will likely be a correction as short-term traders take profit. Given the links between equities and oil, crude could therefore face a slight fall.

On a trend basis, WTI has rallied strongly this week, and with the start of the US refinery season beginning to start as well as a number of projects being completed to increase the flow of US-produced crude from the Midwest to the Gulf Coast refinery base we could continue to see gains over the coming weeks. The key level to look out for is $98, which the grade has tested twice before this year. This was also the level which the blend crossed in September before rallying up to $100 a few days later (see chart). Hence a strong EIA report or economic data this week could see the WTI blend quickly gaining $2 and even hitting $100 in intra-day trading.

As forecast last week, Brent did indeed rebound from the bottom of its rally and the grade has now gone back up to the $110 area. The grade had trended in $4 range with $110 in its centre before it rose up to $118 earlier in the year on geopolitical issues, and so a return to this range-trading is possible. It’s likely that anything under this range will prompt supply-cuts from Saudi, whereas anything above this is likely to be unsustainable until very strong economic signs from Europe and China.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 27th March

Summary of today’s release: last weeks’ change in Crude Inventories figures:

API: +3.7mb

EIA Consensus:  +1.3mb

EIA actual: +3.3mb

A mixed inventory report was released today, showing a large build in crude inventories of 3.3mb, a whole 2 million barrels above survey expectations. While stock gains were large, markets were supported by the fact that refinery runs stepped up a gear in response to the upcoming spring gasoline refinery season, and a fall in distillate stocks led some to believe that prices for the products could rise over the coming weeks.

The Breakdown

The main bearish points of the report came from the large inventory increase, with 4 of the 5 PADD districts seeing increases. In particular the Gulf Coast saw a 1.5mb rise and Cushing a 439,000 barrel increase. As the graph shows, it’s normal for the Gulf Coast to see such a build at this time of year (represented by the red lines), but it’s also important to watch out for potential supply gluts forming in the area as new pipelines transport US produced crude to refineries that will eventually reach full capacity.

Positive signs came from refinery utilisation levels which jumped 2.2%pts to 85.7%, with net crude inputs increasing by 364,000 b/d. This was combined with a drop in distillate inventories of 4.5 mb, equal to a 4% fall, as well as a fall in gasoline stocks of -1.6mb. Such falls increase the outlook for higher prices and more production, particularly in the distillate market where stocks haven’t been this low for this time of year since 2008. Demand in the distillate produce market has also increased, with 642,000 extra b/d being supplied to wholesalers last week.

Such demand for heavier crude products could help explain the jump in crude imports last week, with 841,000 b/d extra being imported. Such an increase is likely to have all come from heavier blends of crude, the likes of which US are refiners are better set up to process and of which yield higher levels of heavy crude products. This goes to show that despite massive increases in US production of the last year, product producers continue to rely on imports.

How Markets Reacted

Prices for both WTI and Brent rose slightly on the news, with WTI up $0.24 and Brent up $0.44 by the end of US trading. Such a result shows that markets reacting positively to the EIA release, with other market forces, in particular a bearish European confidence report and a drop in the euro, normally resulting in losses for oil.

Next week’s release

There’s been plenty of talk in the markets this week that the Brent-WTI premium will continue falling, but I believe one of the key charts in an argument against this theory is the days supply chart that I provided a few weeks ago, as shown below. The chart shows days supply is almost 2 days higher than any year in the last 10, and based on normal patterns might not peak for a few more weeks.

Such a scenario makes a sudden market reaction to a future inventory report more likely, as we saw back in January when the Brent-WTI spread widened rapidly after evidence that the Seaway pipeline reversal did little to alleviate supply bottlenecks. Such a situation could happen again if we get confirmation of the effects of various pipelines over the next few weeks not alleviating supply gluts, or if a supply glut appears elsewhere in the system. Hence look out for regional stocks over the coming weeks, in particular at Cushing and the Gulf Coast.

Weekly Crude and WTI Oil Market Summary: Brent-WTI premium falls as Cyprus threatens to blow

18/Mar/13 - 22/Mar/13

The previous week has been characterised as a wild-ride in global markets, with equities, currencies and commodities all experiencing sharp volatility. The cause of the volatility was a country in turmoil, as Cyprus had potential to become the first nation to leave the euro zone, potentially setting off a chain reaction with huge ramifications for the whole of Europe. Crude’s position as an investment asset was again demonstrated by its strong correlation to currencies and equities during the week, while the relatively strong domestic situation and improving infrastructure in the US resulted in a narrowing of the Brent-WTI premium. Overall WTI rose 0.2% on the week, while Brent fell -1.9%, resulting a narrowing of the spread by -$2.3 to $14.

Weekly Summary

Both WTI and Brent gapped down significantly from their Friday closing prices, as a proposed depositor tax in Cyprus, stated as necessary to secure an EU bailout, sparked political turmoil and protests in the country. When European markets opened on Monday, WTI was at $92.3, down $1.1 from its close and Brent was down $0.9 at $108.9. During the course of the day however, European leaders communicated that an easing of the bailout conditions was possible, and what seemed to some like a near-certain exit of the first country from the euro zone began to appear less likely. Because of this, WTI and Brent actually both managed to gain on the day, with WTI increasing 1.4% and Brent 0.6%.  Support for the more internationally-linked Brent may have come after comments by Saudi Oil Minister that $100 is a reasonable price for crude, as well as news that a Libyan pipeline that delivers around 120,000 b/d of crude had been shut.

Despite positive signs from the EU, the eventually defeat of the Bill designed to bring the deposit tax into law played havoc in the markets, where WTI fell -1.8% and Brent -1.7%. While some of the losses were due to uncertain expectations regarding future European output, some of the fall was also the result of a sharp decline in the euro and thus a strengthening USD which makes oil less attractive to holders on non-USD currencies. Media attention relating to last weeks’ reversal of the Longhorn pipeline may also have helped push down the Brent-WTI premium, which reached $15.3 by the end of trading.

Volatility continued on Wednesday as Brent prices climbed 1.0% and WTI prices 1.1%, with the main rise being due to the Fed announcing that it will maintain its rate of monetary easing in its monthly meeting, reiterating that the program will be continued until the labour market, which typically lags economic growth, shows signs of improving. In Cyprus, the announcement that banks would remain closed for the week and policy makers would have more time to discuss the EU bailout supported markets. Meanwhile in the US positive signs for WTI fundamentals were demonstrated by the weekly EIA inventory report that showed stocks at Cushing fell again, as explained in my weekly inventory analysis post. As such the Brent-WTI premium continued to fall, albeit only slightly.

Amid a Monday deadline for Cyprus to raise the funds necessary to secure the EU bailout, the country failed to make any progress in securing Russian-loans and instead sought capital controls to prevent funds leaving the island. What’s more, euro zone worries continued on as the manufacturing PMI, a survey-based indicator that closely leads economic growth, indicated a surprise fall in economic output and confidence. Worryingly the surveys that form the indicator were taken before the problems in Cyprus erupted. Hence crude continues its wild ride on Thursday, as prices for both grades deteriorated by 0.9%. Loses could have been worse were it not for supportive data from the US, where business confidence increases, and China where the PMI rose. However an announcement by the Iranian Supreme Leader that they would attack Israeli cities if provoked failed to raise Brent prices through a risk premium.

The euro strengthened against the dollar on Friday as Cyprus lawmakers sought to debate the legislation that would enable the EU to supply the necessary bailout funds, but the announcement that two Libyan oil fields were shut failed to create a rally in Brent which carried on riding the wave of uncertainty rather than responding to fundamentals. At the close of the week, WTI was at $93.7 and Brent at $107.7, with the Brent-WTI premium narrowing by -$2.3 to $14. Some of the price differential likely came from improved transportation in the US, with fundamentals gradually changing in the background of headline news.

Week Ahead

Monday provides the deadline for Cyprus to raise the necessary funds to secure the EU bailout, and failure to do so will result in withdrawal of emergency liquidity support from the ECB for Cyrprus’ beleaguered banks. Under such a situation, the country’s two largest banks will go under and likely take the country with, if no other help is found. Currently there seems hope that Cyprus’ lawmakers will agree on a depositor tax specifically aimed at raising those with the most funds deposited, while Russia continues to have a huge interest in the situation.

As the graph bellows shows, Brent has been trending downwards for weeks now, and while analysts will at some point expect a bottom for Brent prices, the result of the Cyprus vote will likely dictate whether that will be this week or now. If the vote fails, large falls on Monday are likely, whereas if the vote succeeds Brent will likely bounce back up and may begin following WTI in a similar band-trading pattern as has been experienced by the US blend. Importantly we can note that Brent is now approaching its price level last seen before positive economic signs and geopolitical tensions really heated up. Hence based on this, a higher price is likely if Europe doesn't explode.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 20th March

Weekly WTI Crude Oil Inventory Analysis: EIA release of 20^th March

Summary of today’s release: last weeks’ change in Crude Inventories figures:

API: -0.4mb

EIA Consensus:  +2mb

EIA actual: -1.3mb

US crude inventories dropped by a surprise -1.3mb last week, against a consensus forecast for a rise of 2mb. The fall was a result of a -2.7mb drop on the West coast, which is often discounted from US models due to its isolation from the rest of the country in terms of oil transportation. Without this drop, inventories actually rose.

The Breakdown

While a fall in West Coast stocks caused the positive headline number, inventories at Cushing also declined for the second week running. With new pipelines coming in to place next quarter (See Seaway No Solution), signs stocks are already dropping provide a bullish view for the market. Gulf coast stocks continued to rise, which is normal for this time of year, although EIA watchers should continue to observe the region to watch out for a possible supply glut transfer from Cushing to the Gulf coast.

US production dropped slightly, and as the production chart below shows the trend has certainly slowed in the last month. The production change can produce headline effects if the increase in large, and so such a sign provided support for crude fundamentals. Likewise refineries ramped up their through-put and utilisation which could be the start of the spring production upturn. Such a thought was given support by the sixth week of gasoline stock withdrawal, providing room for absorption of further future production.

While refineries may have increased their demand, total crude product and in particular gasoline demand did fall. The time series is quite variable, but may nevertheless spook some traders given demand that low had not been seen since early January. On the other hand support for US crudes was provided by imports dropping, and as the chart below shows, the 12-week MA for this series is clearly on a downward trend, reaching lower and lower lows.

How Markets Reacted

The individual market reaction to this release is hard to pin point, given the strong market reaction to the euro area situation in Cyprus as well as the announcement by the Federal Reserve today that the monetary easing program will continue. Overall, the bearish components of rising stocks in a non-West Coast sense as well as a fall in product demand did not seem to detract from otherwise bullish sentiment in afternoon trading, although WTI then dropped off again in the late US afternoon session, ending the US trading session -0.1% down.

Next week’s release

The main point to watch next week will be Cushing supplies, as the completion of the Longhorn pipeline reversal should mean some crude deliveries to the Gulf Coast can bypass the mid-West hub, which would buoy WTI markets and possibly result in a large narrowing of the Brent-WTI premium. At the same time look out for a possible correction next week if we see two consecutive weeks of gasoline demand falls. Indeed, such a result is possible because of the cold weather and snow in the North East Coast of USA this week, which could reduce demand there.

Weekly Crude and WTI Oil Market Summary: Brent-WTI premium drops further

11/Mar/13 - 15/Mar/13

As forecast in last week’s summary, the diverging trends between Brent and WTI continued to be seen this week and the Brent-WTI premium dropped as expected. The premium, which had been $18.9 at last weeks’ close, fell by $2.6 to reach $16.3 by the end of European trading on Friday. While two late days of gains pared an initial three consecutive days of losses, the European grade nevertheless fell -1% on the week, while WTI increased 1.6%.

Weekly Summary

WTI opened in Europe on Monday at $91.8, slightly down in Asia trading from the Friday close of $92. Brent meanwhile had dropped $1 overnight in Asia and continued to be hit by negative sentiment, losing a further -0.2%. The cause of this negative sentiment was Chinese economic data, with the combination of higher-than-expected inflation and lower than expected industrial output growth implying a situation which meant not only was China slowing, but that any attempt at stimulus could result in inflationary problems. The USD meanwhile fell against the euro, possibly only due to a retracement from Friday’s gains in the wake of the positive labour news, but this had the effect of increasing investment flows into the US grade, which by the end of European trading had risen 0.4%.

Two major reports were released on Tuesday; the EIA and OPEC monthly releases. While the former cut its world oil demand forecasts, the latter also cut its growth forecasts for the US and euro zone; the resulting negative sentiment led to a further Brent price cut of -0.4%. Positive news came from China where implied oil demand rose in February, but this was offset by reports that South Korea will be closing a tax loophole in April which will result in less demand for Brent. WTI meanwhile carried on its upward trend, gaining a further 0.4%. Analysts suggest some of this gain would have been further speculation on the Brent-WTI narrowing over the coming weeks, with the Longhorn pipeline reversal  given East Texan crude a route to refiners that will avoid Cushing (see Seaway no Solution). After European trading, the API report showed inventories had decreased by 1.4 mb, against an expectation for the EIA report of a 2.3m rise, which had further positive effect on the WTI blend in US trading.

Despite the drop in inventories shown by the API report, the government-backed EIA survey showed stocks actually increased more than the surveyed 2.3m rise, coming in at a gain of 2.6mb. While overall stocks increased, supplies at Cushing dropped which improved the belief that logistical bottlenecks, the main cause of low WTI prices, are being overcome. This fine detail pared losses for WTI, but the grade nevertheless fell -0.2% due to the inventory increase. On top of this news, the IEA released its monthly report which confirmed a 2013 oil demand decrease as also forecast by the EIA. The international agency also reported that OPEC production had increased in February, with output in Iraq in particular growing strongly. Adding to supply issues was further negative sentiment in the euro area where industrial production fell 0.4% m/m. The combination of a weaker European demand picture and increasing OPEC supplies led to further speculation that the Brent-WTI premium will fall. Indeed the grades closed at their lowest difference since January at $15.7, caused by a larger fall in Brent of -0.9%.

Brent finally saw some respite on Thursday, with both grades gaining strongly after US jobs numbers came in positive for the third consecutive week and the oil risk premium increased after US President Obama confirmed military force remained an option to prevent Iran gaining nuclear capability. Additionally in the US, a bipartisan group introduced a bill into the Senate that would give Congress the power to approve the Keystone XL pipeline without Presidential approval. While the technicalities and legality of the bill could be called into question, the pressure from the action should nevertheless prompt Obama to make a decision sooner rather than later, with the majority believing the pipeline will be approved. Such a decision could further alleviate supply gluts. Oil also received a boost from a further easing of the USD, and by the end of European trading WTI was up 0.8% and Brent 0.9%.

Brent continued to outpace WTI on Friday, with the European blend gaining 0.5% veruss at 0.2% rise in WTI. The positive momentum came despite a slip in US consumer confidence. Rather, a CPI release showing inflation is contained reduced the chance of the Fed pulling back its monetary easing program, thus leading to a further depreciation of the USD and therefore flows into oil as it became a more attractive investment, particular with both short and long term forecasts for US oil prices to increase. By the end of European trading, WTI had reached $93.5, a rise of $1.5 from its previous close, and Brent $109.8, down $1.1. The last two days of Brent strength resulted in the Brent-WTI premium widening, but the premium nevertheless fell to its lowest weekly close since January 18^th.

Week Ahead

Data-wise, the German ZEW on Tuesday could dictate European economic sentiment, while US housing starts could prove positive for markets given the current consensus of a larger rise than last month.  The annual UK budget will be announced on Wednesday with its possible market implications, and later in the afternoon the Fed will meet for its rate decision, with market participants continuing to look for any clues regarding how long quantitative easing will continue. A fourth consecutive week of increasing jobless claims could combine with positive existing home sales data and an improving business conditions index on Thursday.

Charts-wise (see below): On the daily chart Brent formed a reversal pattern on Thursday and Friday, with the so-called tweezers bottoms on Wednesday and Thursday leading to a “three inside up” when including the week-end. If Brent strength continues on Monday, a “three white soldiers” pattern will have formed, implying an upward trend is beginning. WTI meanwhile continues to trend upward, and strength indicators such as the RSI indicate this trend could continue, showing positive momentum but not signalling the grade is anywhere near overbought. WHat's more, the crossover of the 10 & 20 day MA could occur on Monday, which has previously served as a good buy signal. Hence, technical indicators suggest WTI should continue upward at least until its prior support/resistance area of $94.6.

While a positive Monday for Brent could suggest this week’s losses were the end of a downward trend, it’s hard to see Brent gaining much strength in the face of increasing output and with economic growth signs remaining tentative in Europe and Asia. Having said this, a positive ZEW on Tuesday could provide some short-term support. While such an outcome could prevent any serious change in the Brent-WTI spread for the next couple of weeks until confirmation of pipeline effects come into being, if WTI manages to breach its $94.6 resistance level then it could continue to hurtle upwards until the $97-$98 range. Hence I expect to see either a generally stable or slightly decreasing Brent-WTI premium this week.

Weekly Crude and WTI Oil Market Summary: Brent-WTI premium falls on US data

4^th – 8^th March

Early concerns of US fiscal cuts and Chinese economic growth were overcome this week, with record US equities on Tuesday, a weaker USD midweek and positive US jobs numbers on Friday all supporting prices. Overall WTI gained 1.4% and Brent 0.5%, resulting in the Brent-WTI premium falling by $0.8 to reach $ 18.9, the lowest point since January.

Weekly Summary

WTI crude opened the week at $90.6 and Brent at $110.4. Prices fell on Monday as momentum from Friday’s trigger of automatic spending cuts in the US continued, with Brent falling -0.3% and WTI -0.6% in European trading. While news of a shutdown of a key Brent pipeline early in the day did prop up Brent prices temporarily, it was not enough to overcome fiscal concerns as well as negative factory output data from China.

Markets rebounded on Tuesday, propelled by positive sentiment from both the US and China. In the former the Dow Jones Industrial Average rose to the highest level since 2007, while in China leaders committed to targeting 7.5% economic growth and reaffirmed that it will be concentrating on domestic consumption. Such a statement limits perceived downside risks to oil markets from a potential Chinese slowdown, with the belief that further stimulus will be undertaken if economic concerns come in to play. By the end of European trading, WTI had risen 0.6% while Brent gained 1.4%. Toward the end of US trading the API inventory report showed a steep increase of 5.6 mb, including a large increase at Cushing. However the fact that product inventories fell by more than forecast provided some support.

News on Tuesday evening that Venezuelan president Huge Chavez had died caused Brent to gap open somewhat on Wednesday, gaining $0.2 from its previous close. However any chance of a continuation of Tuesday’s momentum was cut short by the EIA inventory release, confirming a large increase in crude stockpiles of 3.8 mb, above a survey estimate of 0.8 mb. This took US inventories to the highest level seen since June, while refineries continued to maintain low utilisation rates. Although this is not unusual for this time of year, the drop was more than anticipated. A further hit to Brent came after news that pipeline flows had resumed after the incident earlier in the week. In all, Brent fell -0.6% while WTI dropped -0.4%.

A combination of a successful Spanish debt auction and the decision by the European Central Bank not to raise rates led to a strengthening euro vs. the USD on Tuesday. The US blend benefited from the currency movements, gaining 1.2%, as anticipation of higher product demand and higher investment flows surfaced. Brent however changed little, rising just 0.1%, as a combination of resumed pipeline flows and a lower dollar played off each other. A technical support of $110 remained unbreached as investors waited key US and Chinese data on Friday.

The first of such data, Chinese crude import demand, came in at a disappointing 9% y/y drop for February, although some of this would have been caused by the occurrence of Chinese New Year in February 2013 vs January 2012. Such news caused an initial drop in Brent prices, with the grade dropping below $110 in early trading. US jobs number later in the day came in strongly positive, with the unemployment rate falling to 7.7% after the US economy added 236,000 jobs versus a consensus forecast of 160,000. Such news provided positive sentiment regarding expectations of US growth, resulting in a rise in the US grade of 0.7% by the close of trading. The flip-side to the news however was that the USD rallied after its Thursday decline, gaining 0.7% versus a basket of currencies and thus preventing any daily gain to be seen in Brent. By end of European trading, Brent was up $0.8 on the week, closing at $110.9, while WTI gained $1.3 to close at $93. The corresponding Brent-WTI premium fell by $0.8 (differences from rounding) to end at $18.9.

Week Ahead

The Brent-WTI premium could be the one to watch this week, with the difference in the two grades falling to below $19 for the first time since 31^st January. Indeed, a quick scan over the Brent and WTI charts shows a clear divergence in trends of the two grades as summed up above. If these different trends continue the premium would drop further.

Such a fall would thus be the result of diverging economic differentials rather than supply fundamentals (a summary of which can be found in my previous post Seaway No Solution), with the US grade gaining over Brent on positive US data while both grades tend to rise on positive data from Europe. Such a situation is clearly delicate; US supply continues to gain ground although has abated in the last two weeks with US crude production flat. Meanwhile Middle Eastern issues have been largely out the news this week as media focused on US fiscal concerns and jobs data. Any new events relating to Middle Eastern concerns could easily ramp up the Brent risk premium and thus price, while WTI could lose ground as easily as it gained (relative to Brent) if production is seen to increase or refiners don’t eventually come out of their low utilisation cycles. Having said this, Goldman Sachs this week reported the belief that refinery and product demand was in fact artificially low as key infrastructure repairs following Hurricane Sandy are still not complete.

Data-wise, credit-growth in China will be reported before markets open on Monday which if positive could lead to initial gains as positive economic momentum from Friday continues. Japan could also officially approve its central bank governor on Monday, although any effect is likely to be minimal as the market has already priced in much of the aggressive monetary easing that is expected under the new leadership. German consumer confidence on Tuesday will likely lead momentum in Europe, with a positive number indicating a supportive Germany crude demand in conjunction and potentially strengthening the euro. Meanwhile Friday’s US consumer price index release, if higher than last month’s, could further fuel speculation that the Fed will soon have to reduce the intensity of its asset purchasing program.

Weekly Crude and WTI Oil Market Summary: Italian and US uncertainty weighs on markets

25^th February – 1^st March

Political instability in Italy reignited the European economic crisis this week, and both Brent and WTI experienced large losses, with Brent falling -3.2% and WTI dropping -2.6%.While losses for WTI were mostly seen on the last two days of the week, Brent suffered each day after a modest increase on Monday. With Brent falling further than WTI, the Brent-WTI premium dropped to $19.7 at the end of the week, $1.3 less than the previous Friday.

Weekly Summary

WTI opened at $93.3 on Monday, while Brent opened at $114.1. While the Italian election was the main media point of the weekend, full results were not yet in by the close of European trading on Monday and so markets made no large movements in either direction.

By the open of European markets on Tuesday, news reports showed a picture of a power vacuum in Italy, with prominent anti-austerity parties gaining ground. Such news had been apparent overnight, resulting in markets in the US and Japan dropping, and both WTI and Brent opened $0.8 down on Tuesday. Throughout the day there were reports that Western powers were offering a greater compromise to Iran regarding international sanctions, which may have eased the Brent risk premium somewhat. WTI finished the day somewhat higher as US consumer confidence came in stronger than expected. Overall the Italian news and its implications affected the European grade more than the American benchmark, with the former dropping -0.8% and the latter increasing 0.3%, resulting in a drop in the Brent-WTI premium saw a drop of $1.2. Such instability also has the effect of appreciating the USD as a result of safe haven flows, thereby causing further pressure on oil as it becomes more expensive for non-USD currency holders.

Brent continued to drop amid European economic worries and political instability in Italy on Wednesday, falling in European trading by a further -0.8%. Meanwhile WTI was stable after an EIA report that showed mixed signs for the US grade (see my weekly inventory analysis post). A declining risk premium was confirmed as Iran hailed negotiations as a positive turning point with Western powers, but losses were pared after Fed chief Bernanke defended the US QE program before congress, while in Europe ECB chairman Draghi confirmed liquidity would be provided as long as it was required. Such high-profile statements signal central bank’s intent to continue doing whatever it takes to ensure a stable economic environment.

US sequester negotiations took the spotlight on Thursday, with democrats supporting a mixture of tax rises and cuts while Republicans looked for a program of pure cuts. Failure to reach an agreement meant an automatic cut in spending totaling $85bn, which could potentially cut 0.6% off economic growth this year. Positive US jobs data were not enough to overcome uncertainty over whether a deal would be made, and WTI dropped -1.1% while Brent fell -0.5%. Technical factors may have enhanced negative momentum for oil, with the benchmark Brent dropping below its 100-day moving average, where sell orders are often clustered.

An early negative data release out of China set the scene for the rest of Friday’s trading, with the PMI manufacturing coming in at the lowest reading since September. With China forecast to be the main driver of oil demand in 2013, both grades fell overnight in Asian trading, leading to WTI and Brent both gapping down $0.5 for the London open. Negative momentum continued in Europe, and the start of US spending cuts combined with news of OPEC export growth in February to push WTI and Brent down, with the US grade falling 1% compared to a 0.5% fall in Brent. Overall WTI finished in European trading at $90.7 and Brent at $110.4. Despite US inventories increasing, the Brent-WTI premium fell $1.3 compared to the week earlier, perhaps due to a fall in risk-premium for the European grade.

Week Ahead

Media reports continue to emphasise political instability in Italy, while there has still been no further progress in agreeing to new spending terms in the US. Such news will likely dominate markets again this week, but the economic release to look out for will be Friday’s US non-farm payrolls employment report. Weekly jobless claims have been positive in the last few weeks, which could mean employment numbers have gained.

Such a result could mean a further narrowing of the Brent-WTI premium in the coming week, with economic worries likely to damage Brent in terms of both demand fundamentals and due to further US safe-haven flows strengthening the USD. WTI meanwhile will gain greatly if US economic signs continue to shine.