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.
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