The market intelligentsia on Twitter is in quite the state of excitement, narrating this late day move lower in WTI to death.
Yes, it is true that WTI is down today. But Brent is holding up fairly well. The most consequential relationship here with the most force behind it is the WTI-Brent spread, not the price per barrel of WTI or Brent exactly.
The WTI-Brent spread exists for stronger logical reasons, whereas the price per barrel of either has historically been prone to large 20% swings played out every few years.
The WTI-Brent spread was over $10 just this past 12 months. What we are seeing, following this major blowout of oil, is constructive so long as the WTI-Brent spread reestablishes itself. So long as the spread is being repaired that is indication of a healing market. I view the EURUSD and European economics as being instrumental in this blowout in the first place.
The confluence of events of European growth disappointments, EURUSD weakness, and Saudi Arabia oil announcements being construed as evidence of consumer weakness (read EU) all led us to where we are. Much of the fear about the oversupplied oil market rested on EU failure to grow and absorb excess. The IMF report set off the panic.
In a sense, it was Brent that dragged down WTI in the first place, as the spot difference between the two evaporated completely.
The WTI-Brent spread reestablishing itself is therefore wholly healthy. This is the first step to a recovery in the price of oil. The spread reestablishing marks a bottom and begins the process of rebidding oil back to the $100 mark. The temporary lull in pricing will also do wonders to ease off global consumers.
For the moment, we cannot say that WTI is selling off further do to economics, rather than traders making bets that the WTI-Brent spread will reestablish itself. From the point of view of a trader, betting on the spread reestablishing is a much safer, much surer bet than outright gambles in commodity price direction.
This is accomplished by buying Brent and selling WTI. Expect fluctuations in both prices in the immediate term. But so long as the spread widens, consider it a blessing and sign of bottoming.
The current state of oil and energy names is a rare opportunity. I am a buyer, with two hands.
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Excellent Crude Oil analysis, thanks Mr. Cain Thaler.
Of course, now both WTI and Brent are bleeding all over the place. But the spread is back to $6
Thanks, always feel I learn something when I read your discussion. Think I’ll add some COP to my long term investment portfolio