For the first time in 3 years, the premium of Brent oil (North Sea) over West Texas Intermediate (US crude WTI) has fallen below zero. Despite an increase in both oil benchmarks, the more rapid rise in the price of WTI has dragged down the spread to $-0.54, for the first time since February 2010.
WTI’s underperformance relative to Brent occurring for most of 2012 was widely attributed to the glut of oil supplies in the continental US resulting from shale rock drilling and spare Canadian production, which overwhelmed refinery capacity.
But US oil inventories have hit 7-month lows of 367 million barrels last week as oil processing surged to 8-year highs. Since late May, rising demand from refineries, which have ramped up their processing of cheap crude oil from North Dakota and Canada as well as increased demand for oil derivatives products had began to erode pipeline and storage activity. Stocks at the oil hub of Cushing, Oklahoma, fell by nearly 2 million barrels in 4 days to 46 million barrels, the lowest level of the year.
The aforementioned dynamics are seen to be largely temporary as they reflect the increase in WTI, rather than a decline in Brent. As refineries near 95% capacity, there is little additional oil they can take on, likely stepping up a fresh glut in the Gulf coast. As a result, the Brent-WTI spread could well stabilise near -1.00 before mounting a gradual recovery in the medium term.
As for the prospect for Brent prices, 4 consecutive weekly gains are set to extend the rally towards $110. As long as support retains foothold above 105.00, we see prospects of calling up $114.00.
Disclosure: FX Solutions assumes no responsibility for errors, inaccuracies or omissions in these materials. FX Solutions does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FX Solutions shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials.
The products offered by FX Solutions are leveraged products which carry a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice if necessary.
WTI’s underperformance relative to Brent occurring for most of 2012 was widely attributed to the glut of oil supplies in the continental US resulting from shale rock drilling and spare Canadian production, which overwhelmed refinery capacity.
But US oil inventories have hit 7-month lows of 367 million barrels last week as oil processing surged to 8-year highs. Since late May, rising demand from refineries, which have ramped up their processing of cheap crude oil from North Dakota and Canada as well as increased demand for oil derivatives products had began to erode pipeline and storage activity. Stocks at the oil hub of Cushing, Oklahoma, fell by nearly 2 million barrels in 4 days to 46 million barrels, the lowest level of the year.
The aforementioned dynamics are seen to be largely temporary as they reflect the increase in WTI, rather than a decline in Brent. As refineries near 95% capacity, there is little additional oil they can take on, likely stepping up a fresh glut in the Gulf coast. As a result, the Brent-WTI spread could well stabilise near -1.00 before mounting a gradual recovery in the medium term.
As for the prospect for Brent prices, 4 consecutive weekly gains are set to extend the rally towards $110. As long as support retains foothold above 105.00, we see prospects of calling up $114.00.
Disclosure: FX Solutions assumes no responsibility for errors, inaccuracies or omissions in these materials. FX Solutions does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FX Solutions shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials.
The products offered by FX Solutions are leveraged products which carry a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice if necessary.