Is WTI Finally Ready to March on Brent?
Thursday, October 27, 2011
It seems as though the NYMEX Light, Sweet Crude Oil contract has captured the near-term momentum, while the Brent contract has remained relatively steady. Recent economic and geopolitical events suggest that the spread between the contracts may narrow. Technically, the Dec NYMEX contract had a breakout above the 90.00 mark, whereas Brent has moved sideways. Some traders may possibly wish to consider buying the December NYMEX Crude Oil contract and selling the December Brent Crude Oil contract at a spread of 17.50 or greater to the Brent. Traders may choose, to exit the spread if the spread narrows to 12.50 or if it widens to 22.50. It is important to note that this spread must be legged, as the contracts trade on different exchanges and there is no margin relief for the spread. This spread can be extremely volatile and may not be suitable for all traders.
Fundamentals
Crude Oil futures have gained on renewed economic optimism and the EU debt agreement. The debt agreement can be seen as a dual boost for Crude Oil futures, as it seems that Europe may not see a hard economic landing and that the Union will also print more Euros, which may stoke inflationary pressure. The recent manufacturing data from China also suggests that the economy there may not be slowing down as much as previously thought. The excessive Crude Oil reserves in the US also may have been worked down lately, due to the slowdown in East Coast refining activity, which could tighten supplies. WTI Crude Oil has made significant gains on Brent Crude Oil in recent sessions. The spread has narrowed to 17.50 from 25.00. This may be evidence that previous suspicions were true and traders were, in fact, using the NYMEX WTI contract as a macroeconomic hedge. The tightening of the spread can also be attributed to the downfall of the Gadhafi regime in Libya, which could result in European Oil supplies loosening.
Technical Notes
The December Crude Oil chart shows the contract making significant technical progress. The market was finally able to cross through resistance at the 90 level and has tested resistance at 95. Prices have also moved above the 20, 50 and 100-day moving averages. The 20-day MA looks as though it is on the verge of crossing the 50-day average to the upside, which could be seen as further technical confirmation of the upside momentum. The market must maintain the 90 level to keep its upside momentum going, as a retreat below the average would likely be seen as a technical defeat. The spread chart between the December Brent Crude and WTI contracts shows a double-bottom pattern forming, suggesting the spread could narrow to 10.00 if confirmed.
Rob Kurzatkowski, Senior Commodity Analyst
