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The price of crude oil is renewing an upward march.
I've said it before, and I'll say it again. It's quite the breath of fresh air after the oil price collapse we experienced at the end of last year.
As of trading close yesterday (2:30 p.m. for oil in New York), West Texas Intermediate (WTI), the benchmark crude rate written in New York, was up another 1.6% for the day, 5.3% for the week, and 10.6% for the month.
Year to date (YTD), WTI is up a hefty 37.8%.
Meanwhile, Brent, the more widely used global benchmark set daily in London, is better by 0.5%, 2.4%, and 5.4%, respectively, with a YTD gain of 28.9%.
Of interest now is the Brent-WTI spread, the difference between the two benchmark figures…
The Oil Benchmark Price Spread
With only a few daily session exceptions since August of 2010, Brent has come in higher than WTI. This reflects the heavier usage of Brent as a yardstick for global trade than WTI, combined with transport problems in the United States to the main pipeline confluence at Cushing, Okla., further reducing the price of WTI.
Therefore, the more accurate way of pressing the spread is taking the nominal difference between the two benchmarks as a percentage of the WTI price, thereby reflecting an actual market discount.
The spread calculated this way has been in double digits (the spread registering a figure at least 10% higher than the WTI price) for 131 consecutive daily sessions…
Until yesterday, when it posted a 9.85% figure.
Further, the spread has narrowed 38.8% since its high for the year (16.1% on Feb. 15) and 44.7% since its high of 2018 (17.81%, set on Dec. 18).
Brent is still at a premium, but the trend line in the spread says that the floor for prices – the rolling average 45-day resistance level (plotting the resistance moving forward by adding the latest trading session while removing the earliest) is actually rising. That trend has remained constant for a longer period than any I have calculated over the past five months and counting.
Put simply, rather than Brent declining to a rising WTI, Brent continues to rise with WTI rising faster.
Anecdotal pundits always keep an eye on U.S. crude production volume and regard higher-than-expected aggregate extractions to constitute a downward pressure on domestic market prices, and thereby a restraint on WTI.
With American lifting poised to become the dominant production globally (surpassing Saudi Arabia and Russia), this has been regarded as decisive in determining the extent to which prices can increase.
This may still fuel how some view the pricing dynamics, but it is less valid than in the past.
Now, there are three overarching considerations to bear in mind on this matter…
These Factors Will Drive Oil Prices in 2019
First, rising U.S. production has been tempered by a market reality now well understood by operating companies.
With the price of WTI pushing toward $63 a barrel and beyond, it is no longer necessary to lift as much as possible to make a profit. Companies can balance a better bottom line with the maintenance of known reserves in place.
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Weekly production totals will fluctuate, and such fluctuation will still influence the U.S. benchmark. But it will not translate into a firm pricing ceiling because the overall balance struck by operating companies even in an overall rising production environment allows for a rise to continue, even if slowly.
The second factor is that, overall, oil prices will continue to be determined by demand someplace other than North America or Western Europe. Essentially, this means demand (and prices) will increasingly be driven by what occurs in Asia, where the energy sector as a whole will progressively take its bearings until at least 2035-2040.
The result: U.S. exports have become a major focus.
American refineries already lead the world in total exports of oil products (gasoline, naphtha, and distillates such as diesel and low sulfur heating oil).
The new race, however, involves exporting crude oil.
U.S. Prospects Soar
Additional exports to higher priced markets internationally are a very profitable drain off from aggregate volume, allowing for additional domestic production without depressing WTI.
However, Gulf Coast capacity to move well production aboard has begun to hit capacity. There is a marginal addition possible, but a further primary increase in exports requires expansion of port, infrastructure, and feeder pipelines.
The solution is what is taking place further down the coast from Houston and the Channel, especially in the area surrounding Corpus Christi. There, increased export facilities are quickly taking shape, fed by new pipelines from the huge Permian basin, while the outlying waters are being dredged to allow access by larger tankers.
There will be some major plays emerging from the port activities.
And the third factor is this: Crude oil demand in the dominant region of Asia and the Pacific is accelerating, as are the rates globally.
Notwithstanding occasional pressures on demand levels, the International Energy Agency (IEA), OPEC, the International Energy Forum (IEF), and the U.S. Energy Information Administration (EIA) are in agreement about worldwide crude oil demand levels setting records this year, increasing even faster than expected.
Pay No Mind to Naysayers and Short Sellers
Against this backdrop, there remain traders intent on introducing panic – e.g. China is slowing down; a European, American, worldwide (take your pick) recession is about to hit; or somehow a bond yield inversion will morph into declining industrial and overall economic performance – to allow a brief opportunity to short oil.
There will remain broader windows for shorts, and they will have an effect. But the heavier scare tactics are not working.
Contrary factors are no longer providing major headwinds against oil prices. Once again, President Trump has attempted to use the White House bully pulpit to urge Saudi Arabia to increase production (thereby providing a possible restraint on price rises). Once again, the Saudis and OPEC as a whole have ignored him and stuck to maintaining a firm floor for the price by retaining production cuts.
In fact, OPEC and the main outside partner Russia have renewed those cuts. In a clear statement of intent, OPEC canceled its latest meeting at its Secretariat in Vienna, telegraphing that the current cuts will not change for at least the next six months.
My OPEC and Russian contacts are unanimous in disregarding Trump's tweets on oil.
The reason is simple. There remains considerable anger over the politics played last year.
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After declaring the new sanctions against Iran, resulting in calculations of significant declines in Iranian oil exports and precipitating additional production by OPEC and others to fill the gap, Trump at the last minute provided 180-day exemptions for the eight largest importers of Iranian crude.
That immediately created a major glut in the international market pushing oil prices down over 20%. The political ploy was nothing more than avoiding a rise in gasoline prices before a crucial off-year election in the U.S.
Now, either the sanctions are applied in the first week of May (when the exemptions expire) or Washington loses all credibility. Of course, to the extent that the sanctions are applied, supply comes under pressure and the price increases even more.
Elsewhere, ongoing implosion in Venezuela has slashed oil exports from the company that was once the second largest OPEC producer. That slide is accelerating even beyond estimates from analysts, including myself.
And then there are the cuts in exports from the ongoing and intensifying civil war in Libya, widening domestic unrest in Nigeria, persistent deposit problems in offshore Mexico, and other areas of the world.
My Oil Price Target Remains the Same
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.