Oil spreads driven lower as geopolitical events cool

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Oil prices (NYMEX:CLG14) are mixed heading into this morning’s EIA oil inventory report. WTI is showing the very early signs of starting to form a technical bottom while Brent is still clearly in a downtrend as the spot contract breached the $106/bbl level in overnight trading with the current price trading either side of this level. RBOB (NYMEX:RBG14) also is moving lower after another larger than expected build in gasoline stocks reported in the API inventory report late yesterday afternoon. Heating oil is starting to show signs of stability as the market is looking at last week’s colder than normal temperatures are starting to reverse the builds in distillate fuel over the last month or so.

Oil prices… especially Brent… are being driven by an easing of the major geopolitical events in the MENA region. Libyan production is continuing to hold steady around the 650,000 bpd level for the last several weeks suggesting that some level of stability may finally be coming to the oil sector in Libya. In addition, market participants are viewing the progress made so far between the West and Iran on Iran’s nuclear program as promising and something that could lead to additional oil exports coming out of Iran sometime this year and possibly as early as the first half of 2014.

The view that the geopolitical risk is easing is having an impact on the Brent/WTI spread with the Brent side of the equation the primary short term price driver over the last week or so. The spread peaked around the $15/bbl level last week and has been narrowing for the last several days with the February spread now once again approaching the $12/bbl support level.

Further impacting the spread is the upcoming start of the Keystone Gulf Cost pipeline that is expected to begin commercial operations on schedule on Jan. 22 (according to TransCanada). Barring any new geopolitical events I would expect the spread to slowly continue to narrow and move back to a single digit premium of Brent over WTI as additional oil moves out of the Cushing area.

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