Brent Crude at Record Premium to WTI!
Monday, August 22, 2011
So far this year, trying to pick a top in the Brent/WTI spread has proved difficult, as the trend has moved much farther than many traders believed possible. There are some fundamentals starting to move into the market that may finally cause a much needed correction in this spread, the first of which is the drawdown in inventories from Cushing, which are now about 8 million barrels below levels seen earlier this year. Also, should rebel forces actually succeed in overthrowing Libyan leader Moammar Gadhafi, we may see reactionary selling in Brent Crude outright, which could spark long liquidation selling in the Brent/WTI Spread as well. Some traders may wish to consider exploring either selling October Brent Crude outright should prices close below the 200-day moving average, or consider legging into selling October Brent and buying October WTI should the price differential fall below the 20-day moving average. Given the volatility in this market, traders should have an exit strategy in place should the positions move against them.
Fundamentals
The "tale of two crudes" has moved to its next chapter, as Brent futures moved to a new all-time high premium of over $26.00 to WTI Crude futures on Friday. Among the reasons given for the widening Brent premium are concerns that the US economy may be slipping back into a recession, following the severe drop in the Philadelphia Fed manufacturing index on Thursday. We also saw a surprising build of Crude inventories in the US, with the EIA reporting a storage build of 4.223 million barrels last week. Inventories of Brent remain tight, due to the shut-down of Libyan oil exports and a plague of supply issues from the North Sea, with the latest involving an oil leak on a major oil platform. There are some signs that the spread may see some narrowing in the coming weeks, with oil inventories at Cushing, Oklahoma, the delivery point for the NYMEX WTI futures, well off their highest levels, as refineries with access to oil at Cushing continue to take advantage of this "cheap" Crude, which has caused refining margins to move to very profitable levels. Longer-term, many traders are looking to Libya, where rebel forces are moving towards the Libyan capital of Tripoli, which could be signaling the end of the reign of Colonel Gadhafi, and hopefully the resumption of high quality oil exports, though there is no telling how long that may take. Despite the seemingly rampant gloom and doom relating to economic prospects in both the US and Europe, analysts at the major investment banking houses have not yet cut their estimates for Oil prices going into 2012, despite WTI futures hovering near $80 per barrel currently, citing expectations of rising demand globally and tight supplies outside of the US. Additionally, should Oil prices drop further, there are concerns that OPEC will be more proactive in lowering Oil production to keep prices from plunging, as memories of the economic crisis in 2008/09 remain vivid.
Technical Notes
Looking at the daily chart for the October Brent/WTI Crude Oil Spread, we notice that the spread holding nicely above the 20-day moving average and is widening its distance from the 200-day average, as well. The 14-day RSI is showing a bearish divergence, with the indicator failing to make a new high reading, despite the spread moving to a historic high. The RSI, in general, has just moved into overbought territory, with a current reading of 70.26. Resistance for this spread is seen at 27.00, with support seen at the 20-day moving average currently near the 21.50 area.
Mike Zarembski, Senior Commodity Analyst
