Oil spreads narrow as supply issues are resolved

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Dalai Lama XIV

The oil market (NYMEX:CLV13) has continued to react to the U.S. moving to a diplomatic solution for Syria with prices declining for the last three trading sessions. The soon to expire spot WTI contract is now less than $1/bbl off the next key technical support level with the Brent contract in a similar position relative to its technical support. The complex is currently searching for a stabilization level that is reflective of the ongoing supply issues that have been plaguing the market for the last several months. Until places like Libya return to more normal production levels, the downside for the oil complex will be limited relative to where prices are currently trading.

The November Brent/WTI spread has continued to narrow declining for the last two sessions in a row. Since peaking in early September the November spread has lost about half of its value and now less than $1/bbl of its next key technical support level. As the supply issues that I have been discussing for weeks start to resolve themselves the spread will resume its path toward parity. I am still of the view that the spread will trade at parity or even with WTI at a premium to Brent for a sustained period of time as the Cushing takeaway infrastructure continues to come on stream toward the end of the year and into early next year.

The bigger story in the world of oil spreads is the absolute crashing of the U.S.-based crack spreads… in particular the RBOB crack. The November RBOB crack has lost more than half of its value over the last 12 trading sessions. The spot RBOB crack is now trading at the lowest level since the end of November 2011. The supply situation for gasoline remains robust with current inventories well above both last year and the so-called normal five year average. With refiners running to maximize diesel for exports and heating oil for the upcoming winter heating season, gasoline is almost a byproduct at the moment as unneeded supply continues to hit the market.

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