In my article of April 15th, about selling the price difference between North Sea Brent oil (Brent) and West Texas Intermediate (WTI), I described why the price spread between the two most important crude oil types should go back to at least zero. The superior quality of the American West Texas Intermediate justifies a higher price but for logistic reasons WTI has underperformed the last two years. The huge investments in pipelines and refineries in the U.S. should bring the price of WTI back to normal levels.
Below is the chart until May 6th.
We've seen a very nice decrease of the spread. Since the beginning of March WTI has performed really well with respect to Brent and last week the difference was brought back to only $7. However, lately the spread is widening again. In three days time, WTI oil is losing almost $3 towards Brent. The spread was traded around $7 last week and ran up until $10 again this week.
In an update on the spread published on May 6th I gave a few reasons for sticking to the spread rather than getting out at this level. However, it seems there's a little setback due to the following reasons:
· Profit taking
· Tensions in the Middle East
· Sell-off in commodity ETFs
Prices won't go up in one straight line. Every now and then people are taking profits. This is very healthy for a trend: if solid support is found on a lower level it more or less validates the uptrend.
Tensions in the Middle East
Brent oil is more sensitive for tensions in the Middle East then WTI: the Saudis and Iraqis have swapped WTI as a benchmark for a different kind similar to Brent oil. Therefore, unrest in the region (Syria, Iran) is being reflected in Brent oil rather than WTI.
Sell-off in commodity ETFs
The far most important reason for bucking the downtrend at the moment can be found in the renewed sell-off in commodity ETFs. A lot of money stashed here is being withdrawn at the moment. Apparently, the stock market is the place to be. The chart of gold (ETFs) is telling us that commodities are in the dog house right now.
Since the downtrend started in 2011 we see lower highs after lower highs. The recent sell-off in late April may announce the end of the downtrend but there's no evidence yet of such a turnaround: we need to see a double bottom first. For now, it looks quite ugly and we have to wait and see where the market will take us.
The main reasons for setting up this spread are not changed. The U.S. is investing heavily in transport systems and refineries. This makes WTI available for other parts of the world which should support the price of WTI. Renewed pressure on commodity ETFs forces the WTI down. Add a little profit taking and we've got the ingredients for a minor setback.
It's always wise to keep a close eye on the markets. The best thing is to wait until commodity prices have stabilized. For now, further widening should be considered as a chance to set up new positions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.