Oil taking trading cues from dollar and Chinese economy

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It is our attitude at the beginning of a difficult task which, more than anything else, will affect its outcome.

William James

The oil complex continues to look for guidance for its next move. Tuesday the market traded in a relatively tight trading range with a modest gain for WTI and a small loss for Brent. As I have been suggesting the Brent/WTI spread continues in a major realignment on its way back to historical normal levels...not seen for several years. It will certainly take a long time to get back to the point when WTI was trading at a modest premium to Brent. Seems like a long time ago but the natural value of WTI ...based on the quality of both crude oils is for WTI to trade at a premium of $1 to $2/bbl. The spot spread is currently trading  in a range of about $15.50/bbl to about $14/bbl. The spread is still in a backwardation. The spread backwardation is still being driven by the modest backwardation that exists in the Brent market while WTI is in a mild contango in the front of the market and relatively flat in the middle of the forward curve.

EMI QuickView Short Term Market Overview

 

4/25/2012

Impact on  Energy Prices

 

Price Drivers

Crude

Gasoline

HO/Diesel

Nat Gas

Supply

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Demand

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CBr

Inventories

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CBr

US Dollar

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N

Global Equities

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N

10 Yr Treasuries

N

N

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N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

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CBr

Market Sentiment

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Overall View

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Bias

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CBr

N - Neutral    Bu - Bullish    Br- Bearish  CBu - Cautiously Bullish

CBr - Cautiously Bearish

 

 

 

 

In the medium term I expect the spread to stabilize in the range of the $8 to $11/bbl or the level it was trading at prior to the announcement of the EU Iranian crude oil purchase embargo. Beyond that the spread will be driven by the addition of new pipeline capacity to move oil out of PADD 2 and into the Gulf of Mexico area. As more oil flows from North Dakota and Canada the addition of more pipeline capacity from the mid-west to the Gulf will be required to prevent another significant build up of crude oil stocks in this region of the US. I expect there will be ample pipeline capacity and as such I expect the spread to approach more historically normal trading levels by the middle of next year.

Since the entire global energy complex has shifted to pricing against Brent and away from WTI the transition of the spread slowing moving back to more normal levels involves most all individual oils readjusting back to more historical spread relationships. We have seen this in a very pronounced manner already with the RBOB gasoline crack spread that has declined strongly versus WTI as the Brent/WTI spread has narrowed. RBOB (like many other oil products) has been taking its price direction from Brent rather than its more normal historical relationship it had with WTI. Since peaking in early April the June RBOB WTI crack spread has narrowed by about $8/bbl mostly as a result of the Brent/WTI spread narrowing along with the potential supply shortfall of gasoline starting to decline. I expect this spread to narrow even further by possibly another $10/bbl or so as the Brent/WTI spread narrows further and as the market recognizes that there will be not likely be a shortfall of gasoline this summer.

Global equity markets reenergized over the last 24 hours narrowing the week to date loss to 0.9% after a much better than expected earnings report from Apple.  The gain for 2012 is now at 8.5% with all 10 bourses in the Index back in positive territory for the year. Although the Apple earnings gave a boost to the global equity markets, the fact that the global economy is continuing to slow remain the main headwind facing all of the equity bourses around the world. Equities are mildly supportive for oil prices in the very short term but they have been acting more as a bearish price driver over the last few weeks.

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