Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21
Ultimate Gaming and Home Working PC System Build 2021 - 5950X, RTX 3080, Asus MB - Scan Computers UK - 7th Jan 21
Inflation the bug-bear looking forward through 2021 - 7th Jan 21
ESG ETF Investing Flows Drive Clean Energy to Fresh Highs - 7th Jan 21
5 Financial Market Surprises in 2021 - 7th Jan 21
Time to ‘Reset’ Your Investment Portfolio in 2021? - 7th Jan 21
Bitcoin Price Collapses almost 20% at the start 2021 - 7th Jan 21
Fed Taper Nervous Breakdown - 6th Jan 21
What Will the U.S. Dollar Ring in for 2021? - 6th Jan 21
Stock market frenzy- Ride the bandwagon but be sure to take along some gold coins - 6th Jan 21
Overclockers UK Custom Build Gaming System Review Heat Test and Final Conclusion - 6th Jan 21
Precious Metals Resuming Bull Market, Gold, Silver, GDX Trend Forecasts 2021 - 5th Jan 21
Trump’s Iran-COVID-Gate Anniversary  - 5th Jan 21
2021 May Be A Good Year For The Cannabis / Marijuana Sector - 5th Jan 21
Stock Market Approaching an Important Target - 5th Jan 21
Consumer Prices Are Not Reflecting Higher Inflation; Neither Is The CRB - 5th Jan 21
NEW UK Coronavirus PANIC FULL Lockdown Imminent, All Schools to Close! GCSE Exams Cancelled! - 4th Jan 21
The Year the World Fell Down the Rabbit Hole - 4th Jan 21
A Year Like No Other for Precious Metals… and Everything Else - 4th Jan 21
The Stocks Bull Market is Only Half Completed - 4th Jan 21
An In- Depth Look At Gold Price Trend - 4th Jan 21
Building America Back After a Dark Covid Winter - 4th Jan 21
America's Dark Covid Winter Ahead - 4th Jan 21
Buy a Landrover Discovery Sport in 2021? 3 Year Driving Review - 3rd Jan 21
Stock Market Major Peak in Early April 2021 - 3rd Jan 21
Travel and Holidays 2021 - Flight Knight Cabin Bag Review - 3rd Jan 21
�� Happy New Year 2021 Fireworks and Drone Light Show from London and Sheffied - BBC�� - 2nd Jan 2
The Next IMMINENT Global Catastrophe After Coronavirus - 1st Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Crude Oil Spikes Like An Egyptian

Commodities / Crude Oil Jan 31, 2011 - 05:08 AM GMT

By: Dian_L_Chu

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleImages of mass Egyptian protesters clashing with police in Cairo broadcasted around the world shook global financial markets on Friday, Jan. 28. Dow and S&P 500 both dropped more than 1%, while some asset classes such as gold, silver, U.S. Treasuries were hot commodities from safe haven demand.

NYMEX West Texas Intermediate (WTI) also spiked more than 4%, closing at $89.34, while ICE Brent crude for March delivery surged 2.1% to $99.42 a barrel, and touched $99.74 intraday, a new post-2008 high.


Egypt - Home of Two Oil Transport Chokepoints

If you are wondering the significance of Egypt related to the crude oil market. Here is a quick overview.

Egypt, with oil production of about 685,000 barrels of oil a day, is ranked in the top 30 among the world's oil producers, based on U.S. government data. The country is not a significant oil exporter as its production is mostly used for domestic consumption.

However, since Egypt is home to the two world oil transit chokepoints--Suez Canal and Sumed Pipeline--the surge in crude oil prices was partly on worries of potential supply transport disruptions.

Suez Canal Shutdown = Higher Oil Price

Suez Canal is a key water transportation lane between Europe, Middle East and Asia. An estimated 1.8 million barrels per day (b/d) of crude oil and refined petroleum products flowed through the Suez Canal, according to the U.S. EIA. The 200-mile long Sumed pipeline is an alternative to the Suez Canal for transporting oil with a capacity of around of 2.5 million barrels per day.

In the event that the canal is closed, thousands of ships and oil tankers would have to go around Africa, adding about 6,000 kilometers (3,729 miles) to their journey, slashing the availability, while adding to the cost of crude oil.

Increasing Middle East Tensions

Furthermore, since crude oil typically is very sensitive to geopolitics, markets are also nervous because the unrest in Egypt has raised tensions in the Middle East- the world’s major oil-producing region.

As riots first started in Tunisia, spreading to Yemen, and now Egypt, anger over rising prices and high unemployment has also prompted political protests erupting throughout the Arab world in Morocco, Algeria and Saudi Arabia.

Crude & Equities Diverge

Crude oil and equities were mostly trending in tandem since the 2008 financial crisis on the prospect of global economic recovery. And geopolitical event tends to spur a broad market risk-off trade, i.e. selling off of equities and commodities like crude, going into bonds and dollar. However, since the situation in Egypt is very specific to the supply risk of crude oil, this time around, it is risk-off for stocks, but risk-on for crude, resulting in a divergence. (Fig. 1)

WTI-Brent Spread at Record High

The North African turmoil also strengthened North Sea Brent Crude and widened its premium over WTI to a record $12.49 before ending the day at $10.08 (Fig. 2). Historically, WTI, a lighter and sweeter crude, has enjoyed a roughly $2 premium to the North Sean Brent.

This reversal and widening of the WTI-Brent price differential could be most attributed to seasonal and fundamental factors such outages at North Sea, cold weather in Europe, but more importantly is the “Cushing Syndrome.”

“Cushing Syndrome” Distorts WTI

Cushing, Oklahoma is a major crude oil trading hub and price settlement point for the NYMEX WTI. However, Cushing has a capacity and logistic problem, and the resulted land-lock tends to further exaggerate the already weaker U.S. demand, thus distorting against the WTI price. NYMEX WTI is also gradually losing its influence as global crude oil demand growth is shifting to Asia and away from the U.S.

Inventory at Cushing gained 2.3% in the week ended Jan. 21 to the highest since August, while the overall inventory in the U.S. also rose to 340.6 million barrels, 4.25% higher than a year ago, and above the 5-year average, according to the data from the U.S. EIA.

And the glut could get worse as TransCanada Corp.’s Keystone pipeline starts to pump as much as 156,000 barrels of Canadian crude to Cushing in February.

Lack of Transparency Boosts Brent

To be fair, with all the problems WTI seem to have (mostly associated with Cushing), Brent also has one unfair advantage over WTI which has helped boosting its price. That is, unlike the detail crude and product inventory report issued by the U.S. EIA weekly for the WTI crude, Brent does not have such (or any) reporting structure.

So, for all the criticism about WTI and that Brent is a better benchmark reflecting global demand, Brent could actually have been more easily manipulated to its current near $100 levels, due to its lack of transparency, and the considerably lower volumes on ICE (25% of NYMEX WTI, according to the CME Group as quoted by FT Alphaville.)

Higher Price = Better Benchmark?

I personally think most market players probably just pick whichever has the higher price point as being “the better gauge.” So, when the spread flips back to its historical pattern, either by the U.S. working off the excess at Cushing, or by some change of the WTI pricing structure, we could see headlines touting WTI as the better benchmark.

Fast & Furious WTI Short Squeeze

Meanwhile, the record differential has attracted some new spread traders piling into Brent, while shorting the WTI. Bloomberg reported that open interest for Brent futures rose to a record 968,565 on Jan. 21, based on data from ICE Futures Europe.

This not only further distorts the Brent and WTI differential, but also means a fast and furious short squeeze on the NYMEX WTI, with any unexpected events such as the Egyptian unrest. This is why you see WTI move 4% vs. the 2% of Brent on the same news.

Europe Is Not $12 Stronger

Moreover, the fact that the U.S. has more than sufficient crude inventory, a steady global product demand outlook (Fig.3), and plenty of OPEC spare capacity also suggest the world oil is currently well supplied, and there’s little reason Brent’s fundamentals should continue to be that much stronger than the WTI.

As such, I believe the current wide spread while partly supported by regional and seasonal market fundamental factors, is not sustainable.

Be A Brent Bear & WTI Bull

And with this new crisis in Egypt, shorts will likely come off on the WTI as nobody will be shorting crude anywhere, not even the WTI, regardless of the Cushing build. So, from what I've discussed here, I’d be more bearish on Brent and more bullish on WTI.

From that perspective, sometime in the next week or so, I expect WTI to break above $90 a barrel and could make a run at $93 as protests escalate, and Brent could break above $100. Meanwhile, the WTI-Brent spread will likely narrow to around $8 next week, and have the potential to move below $6 over the next few weeks, if chaos continues.

Crack Spread To Narrow Further

In the U.S., with both gasoline and distillate stocks continue to build and stay above the average range, and declining gasoline demand (Fig. 4), the independent refiners like Murphy Oil (MUR), Frontier Oil (FTO), Tesoro (TSO), will likely bear the brunt of this unexpected spike of crude prices further pressuring the crack spread.

Several U.S. refiners - Tesoro (TSO), Western Refining (WNR) and Alon USA (ALJ) each has short float of greater than 10%, while Valero (VLO) short float stood at greater than 20%.

Tanker Stocks Get An Egyptian Pop

Similar to Brent, shares of tanker lines like Frontline (FRO), Teekay Tankers (TNK), General Maritime (GMR), Overseas Shipholding (OSG), and Nordic American Tanker (NAT), also got a pop due to speculation that that tankers would be in high demand if the turmoil in Egypt causes the Suez Canal to close.

So far, the Canal has been operating normally since the riots started, and there’s no indication of a possible shutdown. Nevertheless, since it takes some time for portfolio managers to reallocate funds, and as long as the North African situation remains unresolved, there could be much more upside before the sector’s fundamentals set in again.

Among the tankers, Frontline (FRO), the world’s largest oil tanker operator, would be the best of the bunch from a risk/reward standpoint. I’d stay away from General Maritime (GMR) for the time being mainly due to its high leverage and its struggle with debt in recent months.

Start of a Political Shift in the Arab World

So far, the protests in Egypt seem to have no clear leader or organization, but could be ongoing for a while. For now, they have not spread into the major OPEC countries such as Saudi Arabia in a significant way; however, longer term, this movement could signal a change of political structures of possibly all Arab World in the years to come.

Priceless - Geopolitical Premium

Meanwhile, Bloomberg reported that oil options volatility increased to 30.1%, up 9% in one day as the underlying futures surged the most since Sep. 2009.

So, depending on the development in Egypt and the Middle East, volatility will likely rule crude oil in the near term as there has not been a geopolitical event such as this for a long time, and the “geopolitical premium” rises and falls based purely on markets’ “fear perception.”

Disclosure: No Postions

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2011 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules