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.