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.
No comments:
Post a Comment