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The Narrowing Spread Means Higher Crude Oil Price

Commodities / Crude Oil Nov 02, 2011 - 08:00 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: I just left Baltimore, where I met with the Oil & Energy Investor and Money Morning editorial teams to discuss some interesting new developments.

This was followed rather quickly by a flight to Frankfurt, Germany, for meetings on a potentially major push in the European approach to a rapidly changing energy landscape.


I will fill you in on both later, because today we need to talk a bit about an important matter unfolding in oil...

The Crude Spread is at a Four-Month Low
On Friday, the spread between the Brent price in London and the quote for West Texas Intermediate (WTI) in New York declined to below 20% of the WTI price.

The straight nominal difference of $17.27 is now the lowest it's been since July 6.
And at 18.46%, the spread as a percentage of the closing WTI price (the better way to gauge its actual impact on prices in the United States) is narrower than at any time since June 29.

These changes have been rather dramatic - and quick.

On Oct. 20, the same figures were $25.57 and 30%.

Recall that what has transpired for the past 306 consecutive daily trading sessions, continuously since Aug. 13, 2010, is itself unusual. For that entire period, the market has priced Brent higher, despite it being an inferior grade of crude relative to WTI.

I have discussed the reasons before, but this time around, we need to consider what the shrinking spread actually reveals.

A part of the explanation lies in where the market is going.

However, another part - perhaps even the primary explanation - reflects how traders have been maintaining the spread as other pressures were building in that same market.

Source : http://moneymorning.com/2011/11/02/narrowing-spread-means-higher-crude/

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