Oil sees tale of two markets as WTI/Brent spread widens

Quote of the Day

He who is not every day conquering some fear has not learned the secret of life.

Ralph Waldo Emerson

The tale of two crudes this week with the spot WTI contract (NYMEX:CLZ13) once again under strong selling pressure while the spot Brent contract is modestly higher. The Brent/WTI spread widened by more than 10% overnight. The growing surplus of crude oil in the U.S. is the bearish price driver on the WTI side while the ongoing international supply issues like Libya have been providing support to the Brent contract.

The December Brent/WTI spread is now very close to testing the $12/bbl resistance level that was attempted and failed a week ago. The API reported a huge build in total U.S. crude oil stocks as well as a very large build in Cushing stocks of 2.2 million barrels (see below for a more detailed discussion in inventories). With tightness on the international supply side vs. an abundance of supply in the U.S. and with inventories building again in Cushing, the Brent/WTI spread is not likely to enter into a another narrowing pattern until there are signs that crude oil demand is picking up in the U.S. and the current crude oil inventory building pattern has run its course.

WTI has been in a technical downtrend since peaking in early September. After a few days of a short covering rally, the downtrend seems to be reestablishing itself once again. In addition the fundamentals in the U.S. are pressuring prices and adding downside momentum to the technical downtrend.

On the other hand the spot Brent contract has been in a technical sideways trading pattern with the current price in the middle of the trading range that has been in play since mid-August. Although there are still issues on the international supply side the bearishness coming from the U.S. market is keeping a lid on Brent prices at the moment.

Today the main economic event of the week will hit the media airwaves at mid-day. I and most of the market are expecting the U.S. Fed to keep its massive QE3 program at its current $85 billion dollar level and not enter into a tapering pattern for the time being. The combination of a sluggish jobs market coupled with the partial U.S. government shutdown are the likely catalysts for postponing the start of a tapering program. If the actual outcome is in sync with the expectations, it will be supportive for equities as well as the broader oil and commodity markets.

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