Crude drifts lower

Weekly Energy Market Analysis

Crude oil (NYMEX:CLN14) prices are drifting lower as Libyan rebels announced that the government is now free to start pumping oil from the two eastern ports: EsSider and Ras Lanuf. These two ports would add about 500,000 bpd of oil exports from Libya. The market reaction is muted as the experience with Libya over the last year or so has been very inconsistent. This event is bearish for oil and bearish for the Brent/WTI spread if the ports remain open. The full market reaction is not going to come until market participants are convinced this is not just another short term event.
 

If the agreement holds in Libya and the two eastern ports remain open it will impact the Brent (NYMEX:SCN14) side of the spread much more so than WTI. The combination of Cushing stocks continuing it decline (1.3 million barrel draw reported in the API report last night… see next chart) coupled with a lot more low sulfur oil flowing from Libya should result in pushing the Brent/WTI spread well below the current level it is trading at. The spread has been in a long term narrowing pattern for most of this year with interruptions from time to time on geopolitical events and rounds of short covering. For the first half of 2014 the spread narrowed by about $5.40/bbl or 43.5 percent.

If the Libyan news is more than just words (as has been the case in the past) the August Brent/WTI spread should move relatively quickly to its next downside hurdle or support of around $5.25/bbl. From a technical perspective if the $5.25/bbl support is breached the next hurdle to breach on the way toward the spread returning to its normal historical trading level would be support around the $2/bbl level. Recall last year in the middle of July the spread traded with WTI at a premium to Brent or at its normal historical relationship. The conditions are improving for the spread to work its way toward normalcy as I have been projecting.

Finally, on Libya I am raising a very large caution flag on this news as these announcement have happened in the past only to either not be acted on and/or never last more than a few weeks. Approach this with caution and watch the news hitting the media airwaves on this subject.

We now have the first named storm as the U.S. National hurricane center is reporting Tropical Storm Arthur currently off of the eastern coast of Florida. The storm is no threat to oil and Natural Gas (NYMEX:NGN14) operations in the Gulf as the latest track has it heading up the east coast and strengthening into the first hurricane of the season sometime in the next day or so as it approaches the North Carolina coast.

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