Does the oil complex get bullish?
Posted on 23. nov, 2011 by Riskelia in Weekly Focus | Commentaires fermés
One of the main differences between the present state of financial markets and the 2008 situation is the supportive oil supply / demand outlook. In 2008, the global commodities one year curve sharply shifted to record contango whereas it is hardly positive today. The commodities curve reflects the inventory level. Whereas a trend towards backwardation is associated to inventories depletion, a contango dynamics characterizes inventories accumulation.
As showed in figure 2, the oil markets recently went through backwardation, a behavior which had not been seen since June 2008. This event has been all the more striking that it now concerns the Oil WTI which used to be discredited as a global oil benchmark. Indeed, the delivery point of the WTI contract is Cushing, Oklahoma. This is a landlocked territory remote from the sea where all pipelines converge. Yet, no pipeline ensures the way back towards the sea and the refineries which transform sweet oil into refined products (Gasoline or Heating Oil). Last week, Enbridge operator announced the reversal of the oil flows in the Seaway pipeline, thus easing the transportation of Cushing oil to the Gulf coast markets. Judging by the impressive come back of the WTI curve and the WTI/Brent spread in the recent weeks, the announcement had probably been anticipated…
The chart in figure 4, representing the spread between WTI and Brent on prompt month and one year maturity, depicts the traditional relationship between the US and the European benchmark oils. The sweeter WTI used to be more expensive than the heavier Brent, harder to refine. The renewed backwardation in the WTI prompt month is likely to attract speculative flows, in turn favoring the WTI progression. Thus, the spread is likely to come back to parity, a level which would better correspond to fundamentals equilibrium. Last but not least, the better US outlook and the depressed European growth prospects may work in favor of the WTI catch-up.
In a context of increased tension in the Middle East, a moderate long stance on crude oil could make sense.
Figure 1: Average one year curve in a basket of 19 commodities. The curve is calculated by (Fwd 1year / Fwd prompt -1) for a given commodity.
Figure 2: Average one year curve in a basket of oil and refined products. The curve is calculated by (Fwd 1year / Fwd prompt -1) for a given commodity.
Figure 3: Oil complex roll adjusted price vs. Riskelia’s recommendation
Figure 4: Spread WTI / Brent
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