Crude Oil: Brent/WTI Spread Narrows To Below $3 As Crude Rallies

There is just no keeping Crude Oil prices down. WTI rushed to a fresh new 2013 high, hitting above 106.0 a few hours ago, overtaking the highs of May 2012. While Brent Crude rallied similarly, albeit to a lesser extend, pushing firmly above 108.0 and firming up its position within the 106 – 119 consolidation of Sep 2012 – Feb 2013. The reason for the rally can be traced back to yesterday’s Department of Energy inventory report which showed that Crude Oil Inventories have declined by 9.9 million barrels, much higher than the 2.9M estimate. This is also the 2nd week in a row where inventories actually decreased around 10 million barrels, with the previous occurrence back in Jan 2013, and the following one back in 21st Dec 2011.

Lower inventories suggest stronger/healthier demands, or at the very least suggest that supply chain management of oil is getting more efficient. Either case means better prices/margins for refineries. Couple this with the continued Middle Eastern turmoil, we have the perfect recipe for strong gains in Oil Prices. However, it should be noted that WTI prices are certainly gaining much faster than Brent. This is primarily due to the improvements made in supply chain management from the US end. With oil pipelines in Cushing OK more reliable now, the glut in US oil supply from Texas is not finally able to meet the growing demands better, allowing users to stop importing oil from the North-Sea. Furthermore, WTI oil is of the “Sweet” variety – e.g. less sulphur content, and hence of a higher quality grade. It makes perfect sense for users to purchase WTI is they can help it. This is the main reason why the premium in Brent is getting lower and lower, with many Oil analysts believing that the Brent-WTI spread will converge to zero, or perhaps having WTI being the top dog once more.

Nonetheless, with Brent and WTI both moving upwards, this is a good sign that WTI’s rally will be sustainable. Currently we are enjoying strong bullish winds blowing thanks to yesterday’s Ben Bernanke’s dovish statements. But do not simply expect prices to continue pushing higher indefinitely. Overall, global manufacturing and industrial output is slowing down, and the demand for energy commodities may fall back again once more (seasonality shows us that Summer tend to be the best season for Crude Oil).

WTI Hourly Chart

From a technical perspective, a short-term pullback may be possible with Channel bottom as viable bearish target. Stochastic readings are also suggesting the same with readings moving lower showing a potential bearish cycle. Should Channel be broken, 104.0 will be opened up.

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Brent Hourly Chart

Brent crude is also facing the exact same issue, with price currently on the top end of the narrowing wedge while stochastic readings are starting to peak. Noting the fact that Brent has been lack luster while WTI has been rallying, it stands to reason that Brent may be more affected should risk sentiments start to drag Crude prices lower. This is also reflected via the narrowing wedge, with price likely to break the bottom wedge to produce a stronger bearish breakout compared to the Channel Break of WTI. Should a wedge breakout happen on Brent, 107 opens up as a viable target, with 105-106 consolidation being the next level of target should 107 gets broken.

Original post

Written By: Mingze Wu