07 September 2017 at 15:17 GMT
- Divergence between WTI and Brent has resumed
- Brent has rallied further, found resisistance at $54.67/b
- Brent has benefited from jump in refinery margins
- Weaker dollar provides some underlying support
Brent crude has rallied further, only to run into resistance. Photo: Shutterstock
By Ole Hansen
The diverging performance between WTI and Brent crude that emerged ahead of Hurricane Harvey has resumed this week. Brent crude has rallied further after breaking the downtrend from January only to find resistance today at the May high at $54.67/barrel.
The widening of the spread between Brent and WTI has primarily occurred at the front of the curve. This has come in response to improved Brent fundamentals and a growing glut of WTI crude oil after Harvey knocked out refinery capacity along the Texan Gulf Coast.
Brent crude oil has benefited from a jump in refinery margins around the world in response to the disruptions seen in the US. This has triggered a return to backwardation at the front of the curve, with the prompt futures price trading higher than the following months. WTI crude oil, on the other hand, has suffered from rising contango as the supply glut increased pressure on prompt prices.
The rising backwardation in Brent crude provides a positive roll carry on long positions. This has helped attract interest from investors looking to benefit, while WTI has remained under pressure. The collapse in demand from refineries last week triggered heavy WTI selling from hedge funds. In the week to August 29, funds reduced the net long by 106,000 lots, most of which was due to a near record addition of new short positions.
During a three-week period up until August 29, hedge funds cut bullish bets in WTI crude oil by 133,000 lots, while adding 16,000 lots in Brent.
On that basis, we view the rally this week, apart from the weaker dollar, as primarily having been due to short-covering in WTI crude oil and a short-term improvement in the fundamental outlook for Brent. The return of barrels from Libya after a week of local disruptions combined with the seasonal slowdown in demand normally witnessed at this time of year should continue to limit the upside for oil to $50/b on WTI, a level generally being viewed as the breakeven for many US shale oil producers, and $55/b on Brent.
The EIA's Weekly Petroleum Status Report at 1500 GMT was the first report taking last week's disruptions into account. As expected, the inventory report showed steep declines in production, import/export and refinery demand.
Source: Bloomberg/Saxo Bank
— Edited by John Acher
Ole Hansen is head of commodity strategy at Saxo Bank