Saxo Bank: WTI sprints from Brent after surprise US inventories drop

Baku. 22 September. REPORT.AZ/ "Global markets went quiet ahead of the long awaited Federal Open Market Committee meeting this past week as the first rate hike in almost ten years seemed possible. In the end Janet Yellen and her follow central bankers opted for no change and the statement following the announcement was surprisingly dovish", Ole Hansen, Head of Commodity Strategy at Saxo Bank says. 

While US activity and employment data remains strong the extreme market volatility in late August and developments in commodities and the Chinese exchange rate policy distracted and alarmed the Fed sufficiently to tilt their preference to sitting on their hands for now.

When the FOMC is worried about economic developments outside the US, especially in China and other EM countries, it raises some concerns about the near-term outlook for demand of growth-sensitive commodities such as energy and industrial metals.

The market reaction was therefore not entirely surprising with precious metals once again receiving a bid while industrial metals gave back some of the recent strong gains. The energy sector was mixed with WTI crude oil outperforming Brent by quite a margin following a surprise drop in US inventories together with an overhang of supply from the Atlantic basin.

WTI crude once again found support above $43 before receiving a boost from the bullish inventory report Wednesday. In it the Energy Information Administration (EIA) reported a surprise drop of nearly 2 million barrels at the key delivery hub for WTI crude oil futures at Cushing, Oklahoma. Adding to this a second week of lower imports and lower production combined with a pick-up in refinery demand, the price had nowhere to go but higher.

The short-term outlook for crude oil generally has been negative on the assumption that the annual slowdown in refinery demand from September to November would lead to surging inventories. Although we are just about getting into this season, the latest data failed to support this expectation and it supports the view that oil is settling into a mid-40s range.

Brent crude on the other hand failed to keep up as a strong loading programme for October from the Atlantic basin which include the North Sea and Nigeria will hit the market at a time where European refinery demand slows due to seasonal maintenance.

These developments, combined with continued attempts from US lawmakers to revoke the 40-year old export ban, have triggered a spread contraction between the two benchmarks to the lowest since January. A removal of the export ban would make US crude available to the rest of the world thereby increasing competition between producers and ultimately it could see WTI crude oil's premium over Brent being reinstalled.

The prospect of Iranian oil hitting the market within the next six months, combined with the new worry about EM growth and demand prospects, means the near-term outlook for oil remains challenging. The focus on the current oversupply will not go away any time soon and this leaves the price risk skewed to the downside. Non-Opec production led by the US is slowing but as both the EIA and Opec said in recent reports the positive price impact of this will first be felt during the latter part of 2016.