Crude OIl – Brent Oil Correlation Continues To Widen

Crude oil eased to 101.88 down by 14 cents along with Brent oil which gave up 5 points to trade at 110.37. The overall controlling factor this morning has been a tightening of the trade balance numbers from China and ongoing political theatrics in the US. The drop in US consumer confidence released late on Friday is also weighing on prices. Crude oil prices moved down on Friday as weak consumer sentiment and continued uncertainty over US put pressure on oil prices. Chinese average oil imports in September reached record high at 6.25 million bpd, up 28% on the year. China’s net imports overtook the US as the world’s biggest net oil importer and the trend is expected to continue in future as well. Non-OPEC crude supply is expected to rise by an average of 1.7 million bpd in 2014, according to IEA. OPEC is expected to maintain its output target of 30 million bpd at its December meeting, easing supply concerns. The OPEC report came out last week and showed a drop in OPEC’s oil production in the past month: OPEC’s production during September reached 30.047 million barrels per day, a 389 thousand drop. This decline in production is mostly due to Iraq and Saudi Arabia. Libya’s oil production remains low at 501 thousand barrels per day nearly a third of its normal capacity. If OPEC’s oil production further falls, this could continue to pressure up oil prices mainly Brent oil. The EIA has ceased all operations due to government shutdown and has stopped all publications including the weekly inventory report. Traders are beginning to worry about the lack of data, as the API reports which are considered a leading indicator ahead of the weekly EIA official report have been considerable off the mark in recent month.

The price of WTI crude oil changed direction and declined during last week. WTI fell by 1.75%; Brent oil, however, rose again by 1.66%. As a result, the gap of Brent oil over WTI expanded: The premium ranged between 6.65 and 9.26. Based on the latest EIA weekly report, oil stockpiles rose again by 1.7Mb. The oil stockpiles slightly increased again by 1.7 MB and reached 1,823.4 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.202: this correlation suggests that oil price, assuming all things equal, may decline again next week. But in order to better understand the changes in fundamentals let’s also look at the changes in supply and demand: In the U.S, imports and production increased again last week. Refinery inputs sharply fell.

Natural gas is trading at 3.830 gaining 42 points this morning for no precise explanation except a trade in sentiment. The weak US dollar helps make dollar denominated commodities more attractive. U.S. natural gas futures ended higher on Friday with 8% weekly gains on expectations of cooler weather in the coming weeks. Prices are expected to move up further today. Front-month gas rose 5.3 cents, or 1.42 percent, to settle at 3.776 at the end of the week.