WTI oil poised to replace Brent as benchmark?

Weak data out of China and Fed worries about low inflation and misleading on rate increases is raising hopes for massive global stimulus giving the risk-on trade new life. Oil (NYMEX:CLK14) that was already creeping higher on veiled threats from Vladimir Putin suggesting that the Ukraine should pay for their gas upfront caused a rally. While he also said there should be some discussion before he cuts off the supply it is clear he is reminding the market that he will use his gas as a political weapon. In the meantime pro-Russian separatists still hold buildings in the Ukraine so there are fears that Russia still could be getting ready to act. 

The Fed on the other hand is worried that they have been sending the wrong signal that they are ready to act on raising rates. The Fed minutes popped gold oil as well as stocks when it seems that some Fed Policy makers exaggerated the likely speed of tightening and that it could be misconstrued as indicating a move by the committee to a less accommodative reaction function. Love that Fed speak! The bond market always has the Fed a bit worried as they are pushing the Fed further than they want to go.

Brent crude gained on the broken promises of Libya surrounding the resumptions of their oil exports. Still Oreck is planning for the return not only from Libyan oil but also from Iraq and Iran. OPEC is signaling that they know they will have or deal with more oil and the Saudi's that have been pumping oil like it is going out style will have to cut back.

Yet weak data out of China seems to be cementing expectations that not only will the US lean towards being more accommodative but Europe and  China will have to be as well. The FT reported that Imports and exports both contracted in March, with trade data falling well short of forecasts and rattling nerves over the state of the world's second-biggest economy. Exports decreased 6.6 per cent in March from a year earlier, missing forecasts for a 4.9 per cent rise. It was the second consecutive weak month following February's 18% year-on-year contraction. The value of imports fell 11.3 per cent year-on-year in March – a weaker than expected performance. But in volume terms, most of China's commodities imports rose in the first quarter even as international prices fell.

Natural gas (NYMEX:HPK14) will show its first breath of spring when the EIA reports what should be our first injection of the spring. Yet while the market may celebrates with a modest sell-off the truth is that we still have a very long way to go. It is unlikely that natural gas supply will even get close to the five year average of near 3.8 trillion cubic feet by the end of the refill season. In fact under the best of circumstances we may not even see 3.2 trillion cubic feet. Producers need to see higher prices to get supplies built up and now we don't see that happening. Today we should see an injection of 11 to 15 bcf.

Many years ago I predicted that WTI would reestablish itself as a global benchmark. At that time many in the oil industry thought that that was impossible. Brent was everything and WTI had its day. Yet as the US starts to unleash its oil by building new pipelines and reversing old ones the glut in Oklahoma is now going to be a pulse that will give us an idea how oil demand around the globe is going to be. Now it seems others are agreeing with me.

Bloomberg News reports that "West Texas Intermediate crude is poised to be a worldwide benchmark once more as an easing supply glut narrows the grade's discount to global oil markets. Inventories at Cushing, Oklahoma, the delivery point for WTI futures, tumbled to a four-year low in March. The discount to Brent, used to price more than half the world's oil, is now about $5 a barrel, from as much as $23 in February 2013. Futures and options outstanding, a measure of investor interest, rose 3.2 percent this year, after slumping 14 percent in the past three years. The changes underscore how WTI is reconnecting to global trading as improved pipeline networks boost the flow of WTI to refineries on the Gulf Coast where the oil can be processed. Its status as a benchmark underpins everything from what airlines pay for fuel, to the cost of a tank of gasoline, to how much Mexico makes selling a barrel of crude to the U.S."

Of course readers of the Energy Report knew that this day was coming! Many times I have written that the Glut in Oklahoma would one day come to an end and that because of new oil production that WTI would once again reestablish itself as the global bench mark as far back as 2012.  In May of 2013 I said that "U.S. is the top global crude oil consumer and if it becomes a net-exporter, that will eventually make the WTI the global benchmark, said Phil Flynn, senior energy analyst at The PRICE Futures Group, since it will reflect supply and demand fundamentals. The U.S.'s exposure to emerging markets and South America for export markets will also give the WTI more weight. The energy boom comes from horizontal drilling and multi-stage hydraulic fracturing in "tight" rock formations, mostly located in North Dakota and Texas, the U.S. Energy Information Administration says. It estimates that total U.S. oil production will increase to 8.15 million barrels a day by December 2014, up from 6.89 million produced in November 2012

The speed at which this supply came online changed the economics of oil, Flynn said. "Obviously for the last couple of years, trying to decide on what is the best benchmark has been difficult because of the success of the U.S. energy industry by producing too much oil. We've thought that demand would be determined by China and that all the production would come out of the Middle East," Flynn said. "Part of the problem in the U.S. is that the infrastructure we've built for the last 50 years has been for oil importing… But now that's not the case. Now we're a major producer, and we may become an exporter."

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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