• Oil prices are set to end up this week with a massive gain following three fundamental reports
  • Stocks of crude in Cushing have swollen of late affecting the short-end of the WTI forward curve
  • WTI oil prices (OIL.WTI on xStation5 platform) are trading with a hefty discount to their European counterpart

Oil prices have had a successful week as of yet and they are expected to end up with a notable increase (the biggest weekly gain since mid-September) following three fundamental reports released by OPEC, EIA and IEA earlier this week. All of them spelt out quite the upbeat outlook for the commodity prices, however the devil is in the details as usual.

While the OPEC’s report suggested that we could have had a deficit in the oil market in Q3 (the second quarter of the year saw a similar scenario) being supported by declining stocks, the International Energy Agency offered slightly less favorable forecasts as it called into questioned the prospect of reducing a price-killing global glut despite a bigger than expected drop in US crude inventories. To be precise, the IEA said crude stocks may remain bloated next year thereby capping prices. The main reason for the projection is surging output from US shale fields which could worsen effects caused by reduced production among OPEC and non-OPEC countries.

link do file download linkAn overall level of US oil stocks have fallen lately whereas those in Cushing have seen a healthy increase. Source: Bloomberg

Even as US oil stocks have declined of late, inventories accumulated in Cushing have surged quite massively. This could have been the reason (among others) why we have still contango at the short-end of the WTI oil curve as opposed to the Brent curve which is in backwardation well into the future.

link do file download linkSpread WTI-Brent seems to be depressed historically being more than two standard deviations from the mean. Source: Bloomberg

Moreover, the spread between WTI and Brent appears to suggest a possible bounce towards the mean ca. -2.6. However, such a scenario could take place if oil stocks in Cushing lower, a move which would likely reverse the WTI curve at the short-end pushing it into backwardation. Let us recall that the term structure called backwardation, where future prices are lower than the spot price, could make hedging of future sales unprofitable. In addition, such a shape points to some concerns over oil supply in the short-term encouraging market participants to pay more now instead of putting off purchases to the future.

link do file download linkWTI oil prices have registered decent gains so far this week. The price was able to stay above its local support area at around $49 which was a tipping point. Oil prices are now hovering around $52 which could constitute a handicap for bulls but once they deal with it successfully it could lead to an upward move up to $55. Either way, a longer-term bullish prospect seems to be questionable as more oil could come in from the US if prices continue rising. Source: xStation5