Oil prices are back on the defensive after a short-lived rally in the WTI contract on Tuesday. The API data was mixed, with a huge decline in crude oil stocks and builds in refined products (see below for more details). Oil prices remain in an overall downtrend that has been in play since the middle of June. Yesterday was another typical short-lived short covering rally in WTI that has occurred from time to time while the current trend has been in play.
At the moment the spot Nov WTI contract remains in the $89.50 to $92/bbl trading range, while the spot Brent contract is trading either side of its range support level of $96.50/bbl. Both the Brent (NYMEX:SCV14) and the WTI (NYMEX:CLV14) contracts remain below the level the market was trading at when talk of an OPEC production cut sent prices into a strong one day or so short covering rally last week. For the time being the market, has discounted the talk of an OPEC cut completely and has remained focused on the lackluster demand pattern of the global markets as well as the robust supply situation.
There is not much of a compelling reason to buy the market even with a large draw reported by API in US crude oil stocks as the draw was primarily the result of a large decline in crude oil imports which will likely be somewhat reversed in next week’s report.
The Nov Brent/WTI spread continued to narrow and has moved into a new lower trading range overnight. The new technical trading range is bounded by $5.20/bbl on the resistance end and $4/bbl on the support side. The Nov spread has been steadily shedding its contango premium over the expired Oct spread since the Oct spread expired on Sep 15th. At the moment the spread is being driven more by the overall growing surplus of international light sweet crude oils pressuring the Brent side of the equation rather than what is happening on the US side. I remain of the view that the spread will work its way back to its normal historical relationship before the end of the year.