Since 2012, the -$10.50 level in the WTI/Brent crude oil spread has consistently acted as an important pivot and is therefore quite instructive in showing continuous shifts in the balance of power in the market (see Weekly continuation chart below). First, note that throughout 2012 the -$10.50 level served as important resistance to any rally attempts throughout the calendar year on our journey downward to the November 2012 lows of -$26.00.
In the Spring of 2013 the spread challenged the -$10.50 pivot and eventually broke it, foreshadowing the eventual Summer reclamation of parity in the spread. By October, 2013 we again retested the -$10.50 level and our eventual break of the level lead to a stab at -$20.00, only to resolve itself in yet another retest at the end of 2013.
With so much historical emphasis on the -$10.50 level our recent break above the pivot during the week of Jan. 27 suggests an underlying strength in the WTI-Brent spread with the potential to challenge the old resistance at -$5.00 and perhaps even an eventual retest of parity. That stated, as usual the fly in the ointment for the spread is the -$10.50 level itself which currently serves as support, but if broken will immediately reverse the tone of this market from bullish to bearish.
Richard Weissman is a Senior Associate with the Energy Management Institute (www.emi.org) and author of Trade Like a Casino: Find Your Edge, Manage Risk and Win Like the House.