From the October 01, 2011 issue of Futures Magazine • Subscribe!

Energies & metals remain murky

Markets

Although WTI crude oil opened the year at around $90 per barrel and raced to highs near $115 after fighting broke out in Libya last spring, crude has retraced and currently is trading below the year’s open. Like many commodities, oil is stuck in a tug-of-war between demand destruction from a slowing global economy, and uncertainty over what central banks may do to combat that slowing.

As the Libyan conflict escalated earlier this year, one of the effects it had was to expand the spread between WTI and Brent crude oil contracts. According to Rich Ilczyszyn, senior market strategist at MF Global, WTI normally trades at a premium to Brent by $2-$3, but that spread recently has reversed to Brent trading at a premium of up to $25 over WTI.

Dominick Chirichella, founder of the Energy Management Institute, says a number of factors have contributed to the turnaround. "The WTI-Brent spread is being driven strictly by the underperformance in the North Sea, Libya still being shut in and the force majeure in Nigeria. To a lesser extent, the oversupply situation in PADD 2 in Cushing, Okla. has largely gone away," he says.

Chirichella goes on to say that he expects the spread to hover around the $25-$26 mark until we see breaks in Libya, Nigeria and the North Sea, all of which he says could happen over the next two to three months. Once those factors begin to resolve themselves, he says we should see the spread move into correction mode.

Although things may be resolving in Libya, Nigeria may require more attention says Phil Flynn, senior energy analyst at PFGBest Research. "If you look at the fallout from the Libyan situation, it really hurt the U.S. gasoline situation because European refiners couldn’t refine the higher grade crudes. The hope is that if Libya can get back on-line, then that will fill that void. If we gain Libya but lose Nigeria, then we really haven’t made that much progress," he says.

Supply issues have been the dominant factor in crude oil trading this year largely because of firm demand from the developing world (see "Fueling the dragon"). "Demand, surprisingly, outside of the developed world has held pretty steady," Chirichella says. "If you look at projected demand growth, well over 90% of it is coming from emerging markets, and Asia in particular."

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