The spread between Brent and WTI crude oil has almost reached parity and confirms that the supply-glut for oil is more of a global concern and not confined to the US. Some key fundamentals impacting the global oil markets are:
- The U.S. government’s abandonment of a 40-year ban on the export of domestic oil has been lifted as surging output from shale production has far outpaced demand.
- Russia’s contracting economy and weaker currency encourages it to pump more oil and improve its trade balance.
- A slower Chinese economy has led to a weaker global demand for energy.
- OPEC, in a effort to maintain its market share and discourage competition, has refused to cut oil production quotas (which are rarely followed by any of its members anyway).
- Iran’s return to the energy markets as a major supplier will begin in 2016 as sanctions are lifted.
Back in October-2011, the spread between the two was as much as $28 per barrel. However, the current price parity between the two suggests that U.S. producers may already be cutting back on supplies. The price of WTI Crude may already be closer to stabilizing in that it is not declining as rapidly as Brent Crude. The price ratio chart below illustrates WTI Crude has been outperforming Brent Crude in recent months.
In summary, the above comments should not be misconstrued as as a bullish call on oil. A recovery in the energy markets is probably still months away. However, the narrowing of the spread and divergence in price performance between the two may be interpreted as an early indication that things may be changing. Unfortunately, tomorrow’s EIA report is expected to show another increase in U.S. crude oil inventories. Given the unseasonably warm weather, it would be most surprising, if not incredulous, to see any type of drawdown in crude oil, gasoline or any other refined petroleum products.
Related securities: US Oil Fund (USO) and US Brent Oil (BNO)