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.