The big story over the last twenty four hours in the oil complex has been the strong widening of the Brent/WTI spread as market participants seem to be finally starting to focus on the growing surplus of crude oil in the PADD 3 region of the US. Although Cushing stocks are continuing to destock the oil is simply being shifted to the Gulf region as I have been discussing in the newsletter for months.
The combination of the geopolitical risk emanating from the Ukraine and elsewhere in the MENA region along with only minimal additional oil flowing from Libya has held the Brent side of the spread relatively firm. On the other hand the growing surplus in the Gulf pressured WTI on expiration day for the May contract. As I have been discussing Cushing is quickly becoming part of the Gulf and the inflow and outflow capacity around Cushing is more than adequate to make this location a flow through area.
From a technical perspective the June Brent/WTI spread just blew through the $7/bbl technical resistance level and is now trading in a new higher technical trading range bounded by $7/bbl on the support side and $10/bbl on the resistance end. The WTI forward curve is still in a deep backwardation but with yesterday’s selling the forward curve backwardation narrowed slightly.
The forward curve could be an early indicator as to the forward trading pattern for WTI as well as the Brent/WTI spread. For the time being the forward curve still suggests that crude oil inventories will continue to destock as holding crude oil in inventory remains uneconomical. This also holds for the Gulf region. We will keep this on our radar. At the moment the two main drivers keeping the spread in a short term widening pattern is the surplus of crude oil in the US Gulf and the geopolitical risk to international oil supply on the Brent side.
Overnight the HSBC/Markit Economics PMI for China came in at 48.3 for April or the fourth month in a row that the Purchasing Managers Index is in contraction as it remains below the contraction/expansion threshold of 50. China is the main economic and oil demand growth engine of the world and this energy sensitive Index suggests that China’s oil consumption going forward may not meet the forecasts that have been in play for the last several months. This is a slightly bearish outcome for oil.
Overall the bearish factors that hit the WTI contract (NYMEX:CLM14) yesterday are getting added support with the China PMI data. When the geopolitical risk surrounding the Ukraine eases there could be a broader sell-off in oil prices.
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