Crude Oil & Brent Oil Spread Becoming Worrisome

Crude Oil & Brent Oil Spread Becoming Worrisome
Crude Oil & Brent Oil Spread Becoming Worrisome
Crude oil gave up 21 cents in early trading as the US dollar gains momentum, with the commodity trading at 97.28. Crude oil remains priced well above the fundamentals of supply and demand. Global production continues to increase while implied demand gathers momentum, but weak Chinese data should be weighing on the commodity along with high supplies. Brent oil is flat this morning at 106.38 with the spread narrowing to just about $9.00 indicating a global imbalance in pricing. Energy products moved lower during the course of the week as the diverging outlook between emerging and developed economies continued to raise uncertainty about the demand outlook for commodities. The weakness was primarily driven by weak China manufacturing data together with a slowdown in activity ahead of the Lunar New Year shutdown in several Asian markets.

Crude oil reached the highest level since early January as declining product inventories and the US freezing winter lend support. The discount to Brent crude moved below $10 for the first time since November as rising Libya production ensured increased availability of OPEC oil while US demand was supported by the cold weather. The US has witnessed a record cold January as the “polar vortex” kept the US and Canada frozen, increasing demand for heating energy. As we approach February and March, further contraction of the spread could be hard to achieve as demand for crude oil from US Gulf Coast refineries may ease as the spring maintenance season kicks off.

Natural gas took a major tumbled late in the week and is still light this morning giving up another 45 pips to trade at 4.833. After a steady climb for natural gas throughout the first half of January a return of extreme levels of volatility left many traders battered and bruised. A daily trading range of more than 12 percent was seen on three occasions this past week resulting in volatility spiking to almost 100 percent. As prices climbed above the $5.00 level traders sold off to book profits and then as prices eased reentered the market to push prices back upwards as residential demand supported increased prices. The price reached $5.50 two days in a row before quickly retracing to the upper $4.80 levels. The rally was driven by the speedy reduction in inventory levels which was triggered by rising demand at a time of weather-inflicted lower production. A forecast for milder weather into February resulted in a sharp reversal with the contract seeing its biggest two day decline in more than four years. Heating oil followed the cues from natural gas and recovered 25 points to trade at 3.0013 this morning. The increased strength of the US dollar is also weighing on the prices.

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