Sam Fletcher
OGJ Senior Writer
After waffling all week, the March contract for West Texas Intermediate shot up $3.70 to $89.34/bbl Jan. 28 on the New York Mercantile Exchange as civil unrest in Egypt put Wall Street in a panic. It was its highest price since becoming the front-month contract Jan. 21.
Despite a Western tendency to consider recent riots in Tunisia and Egypt as “North Africa fighting for more democracy,” Olivier Jakob at Petromatrix in Zug, Switzerland, said the one common problem is commodity inflation. The riots “really started this year in La Paz, Bolivia, and are unlikely to end in Cairo,” he said. “The last time we had some widespread riots across the globe was in the first half of 2008, and our index of main consumer commodities is now higher than in the summer of 2008 and 17% higher than at the peaks of 2008 when measured on a euro basis.”
In addition to its growing oil production in the desert away from the urban riots, Egypt is “a key transit point for oil shipments out of the Persian Gulf, via the Suez Canal and the Sumed [Suez-Mediterranean] Pipeline,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Closure of the Suez Canal and the Sumed Pipeline would divert tankers around the southern tip of Africa, the Cape of Good Hope, adding approximately 6,000 miles, or about 15 days, to transit time.” Officials report 585,000 b/d of crude passed through the canal in 2009, while 1.1 million b/d flowed through the pipeline.
WTI-Brent spread
The day before the price hike, the price spread between front-month West Texas Intermediate and North Sea Brent crude widened to a record $11.75/bbl in favor of Brent, prompting speculation it might replace WTI as the market’s usually quoted benchmark. In Houston, analysts at Raymond James & Associates Inc. said, “Until the Cushing, Okla., crude storage picture loosens, we're taking our cues from Brent as a more suitable global indicator.”
Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, noted Jan. 26, “Brent prices have held firm above $95/bbl and are currently within $2 of their high for the year. By contrast, the market for WTI has continued to dislocate, with pricing reflecting fears of localized distressed crude and values lagging…below Brent.”
WTI, he said, “has again become decoupled from both the international market and other regional US markets. While the dislocation is active, we do not see WTI prices and price changes as providing much information that is useful to the global market and see Brent as the better indicator of the state of market fundamentals and sentiment.”
On Jan. 28, James Zhang at Standard New York Securities said, “For the week ahead, we expect the tug of war between WTI and Brent to continue, as Brent seems to be targeting $100/bbl again while WTI could breach $85/bbl to the downside. Right now, we see a higher probability of WTI dragging Brent down than the converse. Consumers may therefore…take advantage of the current weakness in the market.”
Brent came within pennies of the $100/bbl price it had been pursuing, closing at $99.42/bbl Jan. 28. However, Jakob at Petromatrix said, “We fail to find the catalysts to justify the need for such a price. On the supply side, there has been a change of tone from the key OPEC members while on the demand side from the Chinese tightening to the riots of North Africa the signs are clear that we are starting to eat into disposable income and the political instability that comes with it. Oil markets are globally not shifting out of the contango structure (the opposite) and apart from momentum trading, we do not see the justification for Brent to be at $100/bbl especially when cash crude in Europe has to be done at weaker differentials.”
(Online Jan. 31, 2011; author’s e-mail: [email protected])
