Tuesday, September 6, 2011

Brent vs WTI

A lot of attention has been focused on Brent and the Brent WTI spread lately and for good reason.
The blow out of the premium of Brent to WTI over the last 6 or 7 mo.s is currently testing the lows at around -26.50 basis tonight's settle.
click to enlarge

Causes for the extreme divergence from the historic range of -4 to +3 are multiple and well known.
Large flows of crude from Canada to Cushing , the delivery point for WTI,  and the difficulty in moving bbls from Cushing to a port, is principal among them.
Then there is the generally declining production of the North Sea.
In the past, 30 to 40 Brent cargoes of 600,000 bbl.per mo. would load. Not very hard to control, so
Brent has a history of being subject to squeeze plays.
Even with inclusion of additional crude streams to set the dated benchmark ; Forties , Oseberg and Ekofisk -- the total program in August loadings was around 45 cargoes. Currently there are problems with Forties and delays have been announced for 15 of 25 cargoes originally scheduled for Sep.
The backwardation in the contract has also made it significantly more attractive to any spec long players, who benefit on the roll vs. getting killed on the contango in WTI.
Did I forget anything ..oh yeah , Libya
So a large number of extremely bullish factors in favor of the brent premium to wti have been present,
and present for some time.
So if you are a spec with a need to be long energy...you're long Brent.

 Problem is;
European Product Demand 12 Mo. Moving Avg.  Pub. Aug 10 2011

Don't imagine that the above is going to improve dramatically down the road given the Eurozone debacle.

And when it comes to energy fundamentals sooner or later somebody has got to burn the stuff.
Continued strength in the USD seen over the last few days won't help either.

The Oct. contract on ICE expires Sep. 15, 7 business days from now.
from Reuters ;
 click to enlarge
(Note the chart published 1/14/11)

Oct. Open Interest as of Sep 6 was 140,967...up a little from Sep 5.
Nov. was 159,990
Lets go to the Wave count;

 Active Mo. Weekly
 click to enlarge
Note the negative divergence on the 14 week RSI at the recent high labeled B.
c=1.04 of a, nearly equal legs
B retraced .78 of the A
 Active Mo. Daily
 click to enlarge

The correction labeled 2, contains a down and under b wave, underscoring the volatility and potential weakness of the structure when seen in that position.
Additionally the -2- has retraced a Fibonacci .78 of the -1-,  again underscoring volatility.
The -1- found support at the 50% retrace of the  c of B leg. New lows under 98.99, confirming the penetration of the downward sloping trend line, would give weight to the interpretation of  -3- of 3  being underway.

Shorter term, taking out the 106.52 low of Aug 22,  overlapping an internal b sub wave, will target the  retest of the 98.99 low .

Given the set up with a -3- of 3 coming up, Brent could well see a lot of that premium to WTI go bye bye.
I'm thinking the Nov contract. Maybe the terrible conditions in Europe motivate maintenance in the North Sea, maybe QE III ain't what it used to be.

No comments:

Post a Comment