Brent crude oil reaches $21 premium over WTI

China's hot but some like it hot.

Well the one good thing you can say about inflation in China, at least it did not come in a 6%. The Chinese consumer inflation number hit a sizzling 5.5% in May, far short of the whisper number up which seemed to be topping 6%. Still the Chinese government wasted no time in raising the reserve requirements on their banks by a half a point to show that they are less than pleased with the overall inflation direction. Some data coming out of China is showing some softening, especially a surprising report on China crude oil consumption that confirms some industrial demand slowdown in China may be taking its toll on oil demand. According to a report by the National Development and Reform Commission as reported by Bloomberg News, Chinese daily consumption of gasoline, diesel and kerosene dropped to 650,000 metric tons in May. Monthly consumption gained 5.2 percent from a year earlier to 20.19 million tons, with China using 5.82 million tons of gasoline, up 7.5 percent, and 12.84 million tons of diesels up 3.9 percent.

In yesterday's session, demand destruction fears permeated trading yet supplied fears of high quality crude coveted by European refineries blew out the Brent Crude and the West Texas Intermediate oil to an all time high. The strength in the Brent reflects the ongoing loss of high quality Libyan crude and fears of its recent replacement Nigerian bonny light. As reported by Reuters News, "Brent crude rose on Monday to its highest price in more than five weeks, pushing its premium to U.S. benchmark crude past $21 a barrel, a record, as a force majeure in Nigeria further strained a tight European market. Brent's premium to U.S. crude rose another $1.50 a barrel after hitting a series of record highs last week. Traders cited a host of bullish factors in Europe, from Libya's prolonged outage to limited supplies of North Sea benchmark Forties crude. A fresh catalyst emerged on Monday when Royal Dutch Shell declared force majeure on its Nigerian Bonny Light crude oil loadings for June and July. Shell blamed production cutbacks caused by leaks and fires on its Trans-Niger Pipeline. Brent crude for July delivery rose 85 cents to $119.63 a barrel by 11:54 a.m. EDT. .S. July crude fell 80 cents to $98.49 barrel, having slipped as low as $97.81." "The Shell force majeure explains some of the Brent strength and even though there is crude around, it's a question of quality," said Phil Flynn, analyst at PFGBest Research in Chicago. "U.S. crude supplies are ample and there are still concerns about the lack of Libyan (sweet) crude and Saudi intentions to raise output doesn't solve the problem for European refiners because the Saudi crude is sour," Flynn added. U.S. gasoline and heating oil futures were supported by the strength of the Brent contract, which has pushed domestic sweets like Light Louisiana Sweet to big differentials above the benchmark U.S. light sweet crude contract."

Still despite those fears both Brent Crude and WTI took a hit on more fears about Greece after the Standards and Poors. As reported by Bloomberg News, "Greece had its credit rating cut by three levels to CCC by Standard & Poor's and the rating company said the nation is "increasingly likely to restructure its debt." A restructuring would likely, "result in one or more defaults under our criteria," S&P said in a statement today. "Risks for the implementation of Greece's EU/IMF borrowing program are rising, given Greece's increased financing needs and ongoing internal political disagreements surrounding the policy conditions required by Greece's partners." The downgrade comes as the European Central Bank and Germany battle over how to bail out Greece and whether officials should push creditors to share some of the costs. ECB President Jean-Claude Trichet said today that his advice to European governments is to "avoid what would be a compulsory concept "and "avoid whatever would trigger" a default. The outlook on the rating is negative, S&P said. The rating company held its recovery rating at '4,' indicating it estimates bond holders would recover 30 percent to 50 percent of their investment. A "financing gap has emerged in part because Greece's access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize," the report said.

It looks like crude oil is in a choppy downtrend to perhaps the mid eighties! Yes, you heard it here first! Forget all those Jonny come lately's!

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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