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Crude oil prices are rising again.
Much to the relief of oil investors.
The rise has been reflected both by West Texas Intermediate (WTI), the benchmark used for futures contracts set in New York, and Brent, the equivalent set daily in London.
As of close of trade Sept. 19 – which happened at 2:30 for oil – WTI was at $71.12 a barrel, the highest since July 10. Meanwhile, Brent closed slightly higher at $79.23.
I have previously addressed the main reasons for why the price is moving up here in Oil & Energy Investor, and for some time now, the supply side of the market balance has been tightening.
Thanks to this, there is something interesting stirring in the oil sector – something that manifested in a recommendation to my Energy Inner Circle premium subscribers just a couple days ago.
I don't often do this, but this is a fast-track recommendation I'm including today, because you're not going to want to miss out on this…
How Geopolitics Are Influencing Oil Benchmarks
The tightening oil supply has been accentuated by the escalating collapse in OPEC's Venezuela, the nation with the biggest oil reserves worldwide, in addition to the intensifying civil unrest impeding oil production in two other oil cartel members – Libya and Nigeria.
The extraction declines in these three alone have more than offset earlier concerns about Russia and Saudi Arabia agreeing to increase production.
The Saudis yesterday proclaimed that they were comfortable with the current global production levels. Observers then immediately concluded what Riyadh, the capital of Saudi Arabia, had intended the pundits draw from the statement: that no increase in Saudi production would be forthcoming.
That gave further momentum to upward price movement.
Moscow has been moving more volume over the past several months, anticipating that market tightness allows more Russian oil into the market without a glut depressing price.
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On the other hand, I am seeing indicators pointing toward Russia being unable to sustain production any higher beyond where they already are.
The wild card has always been the main outlier to the Russia-OPEC agreement…
The United States.
The U.S.'s Influence on an Encouraging Oil Spread
WTI prices are now high enough to support profitability for operators in just about any domestic production basin. That means they can leave reserves in the ground and on occasion export excess lifting volume to global regions paying higher prices.
True, the ability of U.S. ports to increase crude exports significantly beyond current levels is contained by pipeline, terminal, and other infrastructure limitations.
But that simply adds to the factors obliging restraint on U.S. oil companies.
It is important to remember that the recent escalating rise in company share values is a result of the rising value of the reserves, not the daily production.
All of this adds up to a supply-side picture justifying a continuing price rise. And that is before looming U.S. sanctions against Iran's ability to produce and export crude are factored into the equation.
Given the geopolitical push on prices underway, this should add upward strength to both WTI and Brent. However, the more pronounced impact will be on Brent, as it is the benchmark most used as the standard for oil sales worldwide. This makes it more susceptible to what occurs in the global market than WTI.
Brent has been priced higher than WTI for all but a few trading sessions since mid-August 2010, reflecting the global market's preference to using Brent as the benchmark of choice.
The spread (i.e., the difference between the two benchmarks) has also been expanding.
Yesterday, for the 12th consecutive session, the spread came in at double digits, expressed as a percentage of WTI, the more accurate way of measuring it.
That spread burst into double digits on Sept. 4 and has remained there ever since.
The last time this happened was in the 20 consecutive sessions between May 24 and June 21, a period in which both crude benchmarks increased markedly in price.
In both periods of the spread expansion of 10% or higher, the impact on price favored Brent.
Which leads me to a very interesting profit opportunity…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.