Oil spreads affecting producers’ decisions

A Stimulating Start

The oil market is getting a stimulating start as oil traders look to the ECB to give the trade a boost. Italian bond yields fell hard. It appears their election standoff has ended with the Prime Minister Enrico Letta put in power. Weak data in Europe and weak inflation leaves Mario Draghi little choice but to cut rates. If not, then oil will focus on a very bearish demand outlook and rising supply. But add a dash of stimulus and we see oil near a two week high.

Friday we saw a sharp drop in oil and other markets as it appears someone had a margin call that had to be met. The market is rebounding and is glowing in the anticipation of a world where money is cheap and easy.

Natural gas is bouncing back! Once again natural gas seemed to reverse direction when oil took a sudden drop. Nat gas was lower and came back late in the session. Perhaps it was just expiration movement or perhaps more evidence of natural gas as a safe haven commodity.

I still believe that natural gas is one of the best plays in the commodity markets today. By using a combination of futures and options we feel that we can build a nice long term position preparing for perhaps a doubling of the current price in a couple of years.

All of the talk about the Whiting, Indiana BP refinery and whether or not they are close to ramping up after the replacement of a crude unit may have a significant impact on the global oil market in ways that might be a bit of a surprise. It may have a big impact on the Brent/WTI spread. Robert Campbell of Reuters writes, "West Texas Intermediate crude oil futures have climbed sharply against Brent this week, but there is good reason to believe it is the beginning, not the end, of the rally. Since the start of April, WTI has raised nearly $4 a barrel against Brent, spurred by traders betting that the glut at Cushing, Oklahoma, the delivery point for WTI futures, is poised to clear.”

This week there are signs that oil major BP is stepping up the amount of crude it was withdrawing from Cushing on its pipeline between the hub and its refinery in Whiting, Indiana, gave WTI bulls the final push. So now the question is, could the rally reverse as WTI nears its 100-day moving average? Will traders reassess the risks to WTI after a big move up?

WTI has been held back for the last two years by a glut of crude at Cushing caused by a shortage of pipeline capacity that would take oil to more profitable markets. But with the anticipated restart of BP's 405,000 barrels per day Whiting, Indiana refinery, traders are betting Cushing is no longer short takeaway capacity.  WTI doubters worry that as the contract gains in strength, oil producers will send their crude to Cushing, Oklahoma, the delivery point for WTI futures, rather than rely on costly rail shipments to coastal markets.

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