US Oil (WTI) trades above UK Oil (Brent) for first time since August 2010

At the beginning of the July we stated “While the events in the Middle East have stolen the headlines once again, there appears to be something larger underway driving the movements witnessed in oil. Ideally, if the political turmoil in Egypt was the primary reason behind the rally in crude, then we would expect to see the price of Brent outpace the appreciation of WTI, however this has not been the case as the spread between UK and US Oil has narrowed to less than $5, which is the lowest level since January 2011. Fundamentally, this shift is best explained by improved crude oil transportation channels from the mid-west, enabling for more supply to those in the US and thus reducing the dependence on foreign imports. This was evident it today’s US weekly crude oil inventories, which saw a draw of 10.35M barrels, versus an expected decline of 2.25M barrels – This was the biggest weekly draw since December 2012 and the largest summertime decline since July 2000.”

This trend has continued over the past few weeks as US weekly crude oil inventories continued to show larger than anticipated draws:

Week of 7/5: -9.9M barrels vs. consensus -3.2M
Week of 7/12: -6.9M barrels vs. consensus -2.0M

Hence, an abatement of the former US oil transportation issues has lead what was once a substantial supply glut into a drawdown. Furthermore, the fiscal drag in the US has not had as significant of an impact on the economy as initially feared, leading to a more resilient demand driven outlook for crude oil here in the States. That being said, the same cannot be said for Europe, China and much of the emerging world as fiscal and monetary policies have not done enough to stimulate their respective economies and could in fact be part of the overall problem.

As a result, earlier today US Oil actually traded above UK Oil for the first time since August 2010. Furthermore, although tensions in the Middle East have escalated over the past few months, leading to part of the run up in crude oil prices, we have yet to see any major supply shocks. Once the summer driving season comes to an end, the market could come around to this realization and look to remove the premium built up due to the elevated Middle East tensions. Consequently, this could actually see WTI trade at a slight premium to Brent as it did throughout much of the 90’s and early 2000’s.

Source: Forex.com

19.07.2013