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.