The Iraqi oil price risk premium is now completely out of the market even as the fighting continues but oil flow has not been interrupted nor does it look like it will anytime soon. Both Brent NYMEX:SCN14 and WTI (NYMEX:CLN14) prices are back to the pre-Iraqi crisis level and the trading range that was in play going back to mid-May. The combination of Iraq oil still flowing as normal and the potential for additional crude oil supplies from Libya have been weighing on the market for the last week or so. Not only has the flat price been in a downtrend since the third week of June but key spreads like the Brent/WTI spread has been back in a narrowing pattern since June 20th.
In spite of the start of destocking of the surplus crude oil inventories in the U.S. global supply and demand balances remain biased to the oversupplied side. The physical cargo market is still biased to the bearish side a large number of cargoes remain on offer. Last night’s API inventory data (see below for more details) release was mixed with a crude oil decline less than the expectations and a build in Cushing stocks versus an expectation for a small draw. Even with that the August Brent/WTI spread is still narrowing further overnight as the major portion of the narrowing has been coming from the international side of the spread.
The August Brent/WTI spread is now within $0.10/bbl of testing the current technical range support level of $5.25/bbl. If the spread breaches and settles below the support level the path toward normalcy will have to breach the next several support levels at $3.40/bbl hit on 4/11 of this year, then around $2/bbl traded back in September of 2013 and finally parity which was hit back in July of 2013. As I have discussed many times I remain bearish for the spread and expect it to trade in its normal historical relationship of WTI at a modest premium over Brent sometime during the next three to six months.