Crude prepares for a correction

Oil (CME:CLM14) prices have been toppy so far this week with the spot WTI contract showing the early signs of putting in a short term technical top while the Brent contract has been drifting lower. The market is recovering some of yesterday’s losses as the geopolitical issues evolving in the Ukraine, Libya and Iraq continue to provide a level of support to the complex.

From a technical perspective the spot WTI contract has stalled around the $104.50/bbl level for the last three trading sessions suggesting that the bears are slowly gaining control. It also suggest that we may have seen the highs for the short term with a downside correction increasing in probability. Brent (NYMEX:SCM14) has already turned the corner and has been in a slight downtrend for the last five trading sessions.

The July Brent/WTI spread has stalled this week so far after narrowing about $2/bbl last week as Cushing stocks continue to decline and are now close to the pre-surplus range. I am expecting another modest draw in Cushing stocks this week. Cushing stock are already over 18 million barrels below the highs of this year (through last week’s EIA inventory report) and have been in a destocking trend for most of the year. I continue to expect the spread to move back to historical trading levels with WTI trading at a modest premium over Brent sometime during the next three to six months.

With the U.S. Administration continuing to delay a decision on the Keystone XL pipeline more oil is flowing via rail from Canada to the United States. The Canadian National Energy Board’s latest release showed that 160,164 bpd of Canadian oil flowed to the US via rail during the first quarter of this year. As shown in the following table the flow rate via rail has been steadily increasing since 2012.

Further to the above TransCanada Corp is in talks with customers about shipping Canadian crude to the United States by rail as an alternative to its Keystone XL pipeline project that has been mired in political delays, as reported by Reuters. The comments are the first to confirm growing speculation that TransCanada might use more costly and controversial railway shipments as a stopgap alternative to the Keystone XL pipeline, whose approval has been delayed by the U.S. government.

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