EIA data yesterday confirmed the ongoing trend of reduced supplies in WTI crude, gasoline and distillates. With all three elements of the report featuring larger than expected draws in inventories, it was no real surprise to see the energy complex trade higher. While this data does continue to paint the US crude markets in a bullish hue, the overseas Brent crude oil pricing is starting to show more significant strength relative to the domestic price discovery.
The spread between the WTI crude and Brent crude contracts is widely followed and can be a strong directional tool. The relatively recent shift from bearish to bullish sentiment in crude has started to push this spread higher, with it trading above 7 dollars in early morning action. The Brent, which trades for the most part at a premium to the WTI, traded above 66 dollars this morning, while the WTI remains below 60 dollars, though still modestly higher on the day. In recent months, we have seen that spread trade between virtual parity (equal to each other) and as high as over 12 dollars premium to the Brent side. The Brent tends to be more reactive to directional moves, generally making the spread contract in bear markets and expand in bull markets. While this is not always the case, one can look at the a recent rally from the 5 dollar support level in the spread as more possible evidence that near term higher pricing could be on the horizon.
The FOMC minutes report was released yesterday with little surprise. It noted that weaker first quarter data, while most likely seasonal and transitory, should keep the committee from raising rates at the June meeting. The minutes did confirm that the language has changed as far any calendar references in the outlook for rates, leaving the decision instead up to data dependency. If that is the case, one could expect the Fed to most likely wait until second quarter GDP data is readily available before making a decision, pushing any chance of a rate hike out past the July reading. This does enhance the bullish demand for energies with easy money slated to be around longer.
Natural gas is attempting to shake off another test to the down side after the rapid rise to 3.10 was rejected two days ago. The 2.90 level held for the most part with the current price at 2.95. It does appear poised to make another run at the high, but that will depend greatly on the inventory data due out in a couple of hours. While the macro trend would have to still be to the down side, the shorter term trend is higher, especially when coupled with the technical key reversal witness several weeks ago just off the recent lows.
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