WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.
But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.
If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy:
The number of cargoes that go towards determining the Dated Brent price is rising.
As Reuters reported on Thursday:
At least nine May cargoes have moved up the North Sea Forties crude programme after stronger-than-expected output from Britain’s Buzzard oilfield, the biggest contributor to the Forties stream.
According to the EIA, the definition of “spot market” is:
The price for a one-time open market transaction for immediate delivery of a specific quantity of product at a specific location where the commodity is purchased “on the spot” at current market rates. Read more
An excellent observation from John Kemp over at Reuters on Tuesday regarding the spot/forward disconnect we’ve been talking about:
The increasingly close linkage between hedge funds and spot prices since 2010 has also coincided with a sharp reduction in the correlation between front-month and far-forward prices. Correlation between spot month and forward prices, generally above 90 percent until 2010, is now often less than 50 percent (Charts 5-6). Read more
Nymex WTI futures trade experienced somewhat of a wobble on Wednesday.
As Stephen Schork highlights in his chart of the day: Read more
This is a follow up to Thursday’s post about Rosneft’s 500 million barrel collateralised financing (to raise money for its purchase of BNP-TNK) and how the market managed to absorb it almost without any price impact.
Most of the previous post was based on the observations of Philip. K. Verleger, who believed the latter point represented a triumph for the futures markets, which had reached a whole new level of maturity.
And yet, as we have been reporting, it’s always more important to look to the curve. Spot price, or “flat price” as traders like to call it, is almost irrelevant. What’s happening in so-called time-spreads is usually much more critical. (And yes, nobody usually takes unhedged positions on flat price.) Read more
Some excellent market commentary from Olivier Jakob at Petromatrix on Friday morning regarding the current state of oil market (dis)equilibrium and the potentially precarious position of Saudi Arabia. Read more
Did anyone notice how the Brent slump seemed to come to a dramatic halt around June?
Late last Friday afternoon, WTI crude futures experienced one of their sharpest price increases since the Libya crisis of last year:
We appreciate that this will not be news for anyone who’s been watching oil markets closely.
However, we still think it’s a valuable recap. Read more
From John Kemp at Reuters on Monday (our emphasis):
Hedge funds and other money managers reduced their long position in U.S. crude by the equivalent of nearly 54 million barrels of oil, the largest one-week decline since at least June 2006, according to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday. The long liquidation was three times greater than in the “flash crash”, almost exactly a year ago on May 5, 2011, when speculative longs were cut by a little under 19 million barrels.—– Read more
Back in early 2011, a very intriguing thing happened in the oil markets.
As if by magic — (well, over the period of about a couple of months) — the market collectively and spontaneously moved from using WTI as its primary benchmark for pricing product spreads over to the Brent contract. The era of the “Brent crack” was born. Read more
Last week we wrote about John Kemp’s column pointing out that CFTC data suggests hedgers — those who are exposed to physical prices through their business operations — fuel resellers and others hedge against their operational exposure to oil prices — collectively had the smallest net short position in six years in late April.
We advanced a few possible explanations of our own, including the idea they’d mainly popped over to the Brent market. Read more
From oil to copper, something strange is going on with commodity inventories.
Official stocks are rising across numerous commodities, but analysts and traders swear fundamentals remain tight, while prices stay supported: Read more
Something of a strange one this. Every analyst and his dog has for the longest while been preaching that demand for crude post-crisis has really been all about emerging market demand… that the US, by and large, has become increasingly irrelevant when it comes to global supply and demand.
Yet, from Reuters last week, we had this: Read more
The following chart comes via John Kemp at Reuters. And as he notes this one kind of speaks for itself:
Courtesy of Olivier Jakob at Petromatrix, FT Alphaville presents the price of front-month Brent oil futures expressed in euro terms:
John Kemp at Thomson Reuters is a big fan of commodity curves — backwardation, contango and all the principles that come with it.
As he often notes, one of the key theories affecting the area is the idea of a convenience yield, initially popularised by John Maynard Keynes. Read more
Whoa…. look at that move in the WTI-Brent spread. That’s at least $4 worth of tightening in less than 10 minutes:
From Olivier Jakob at Petromatrix on Wednesday:
While crude oil futures continue to be supported by the Iranium premium, the products are not following and the light-end cracks are suffering further. The Naphtha and RBOB cracks to Brent are going as we expected deeper into negative territory and the pressure is now also coming to the European Distillates physical premiums. This is something to follow closely given that the refining margins are currently supported only by the Distillate and Fuel Oil crack. ICE Gasoil expires tomorrow and the backwardation is going through the roof but with a very slow start to winter we have to monitor the weakening trend in the physical premiums. NYMEX Heating Oil is starting to enter contango territory. Read more
John Kemp at Reuters has penned a cracking column on the current peculiarities afflicting the crude markets.
As Kemp notes, ask anyone in the market — specifically the physical market — and they will tell you the market is tight. Not just tight. Really tight. (And most likely that the recent backwardation reflects this tightness.) Read more
Over in the spot iron ore market… there’s a small case of crisis going on.
As Reuters reported on Thursday, prices have been falling consecutively on “slow Chinese demand” and hefty spot supplies. It’s so bad, Reuters says miners are flooding cargoes into the market just to get the best prices while they can. For now, the price of spot iron ore is still more than double miners’ production costs of around $50 a tonne, so the incentive is quite clear. Read more
It’s only been four days, yet the backwardation in WTI — which caught everyone by surprise on Monday — has already started to ease.
Of course, if it turns out to be this short-lived, the theory that the flip may have been caused by a short squeeze rather than fundamental tightness, becomes easier to imagine. Read more
What flipped WTI so quickly and severely into backwardation?
Increasingly, a consensus is forming that it was nothing more than a short squeeze. We’ve mentioned this before, but here are some more thoughts from the analyst community on Wednesday. Read more
Here’s an interesting chart from the EDHEC-Risk Institute’s latest report on long-short commodity investing:
It was quite a day on Monday for the WTI US oil benchmark. The structure of the futures curve finally flipped into a subtle backwardation, seeing the contract join Brent in a formation which sees front month futures trade more expensive to those further out.
The last time WTI was seen displaying a backwardated structure was in October 2008. Read more
How do you actually profit from a contango trade? Read more
If you’re wondering what Goldman Sach’s view on crude is — it can be summed up in one neat sentence from their latest research note:
The world crude oil market remains exceptionally tight. Read more
Since the Treasury yield curve is becoming less responsive to Fed intervention, we’ve outlined the case for why it might make sense for the Fed to start targeting the energy curve instead.
Obviously the Fed mandate remains an issue. Read more