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US Could Be the Epicenter of Global Crude Oil Bear Market in 2016

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US Could Be the Epicenter of Global Crude Oil Bear Market in 2016 PART 1 OF 6

Why the WTI-Brent Spread Is Almost Zero

WTI and Brent crude oil price movement 

WTI (West Texas Intermediate) crude oil futures for February delivery rose by 4% to settle at $36.14 per barrel in yesterday’s trade. WTI prices rose due to the lifting of the US crude oil export ban. In contrast, Brent crude oil prices fell by 0.66% to close at $36.11 per barrel in yesterday’s trade. Brent prices fell due to weak winter demand and record OPEC production. The United States Oil Fund LP (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) followed US crude oil prices yesterday, rising by 1% and 1.4%, respectively.

Why the WTI-Brent Spread Is Almost Zero

WTI-Brent spread 

The WTI-Brent spread narrowed to $0.04 per barrel yesterday. WTI oil prices are higher than Brent oil prices for the first time since January 2015. Brent oil traded higher than WTI oil by $14 per barrel in February 2015. The lifting of the 40-year-old crude oil export ban has boosted US crude oil prices and will likely motivate producers to increase production.

Oil companies like Continental Resources (CLR), Pioneer Natural Resources (PXD), ConocoPhillips (COP), and Hess Corporation (HES) have been lobbying the government to lift the oil export ban. However, the current WTI-Brent spread makes US crude oil exports unviable. Hess speculates that US oil could trade higher by $3–$8 per barrel due to the lifting of the ban. Higher oil prices could affect the profitability of US refiners like Tesoro Corporation (TSO) and Valero Energy Corporation (VLO). 

OPEC meeting

In its meeting on December 4, 2015, OPEC (Organization of the Petroleum Exporting Countries) abandoned its collective output target, and this decision is weighing on the global oil market. OPEC members lost $500 billion of revenue in 2015 due to lower oil prices, according to estimates of the IEA (International Energy Agency). This puts pressure on the budgets of OPEC members, and we could see OPEC countries cut back on public spending or use their cash reserves.

As a result, countries like Iran, Iraq, and Saudi Arabia are fighting for market share within the group and are offering massive discounts to buyers in Asia, the United States, and Europe. Iran’s plans to scale up production are seen as a potential threat by Iraq and Saudi Arabia, as Iran could recapture its market share. Thus, these countries are luring buyers with attractive discounts and long-term contracts. As a result, oil prices could fall.

Volatility analysis

Yesterday was the fifth day in the last ten trading sessions in which crude oil prices rose. Prices have fallen by 1.8% more on the average down days than on the average up days. WTI oil was among the top performers in yesterday’s trade.

US crude oil prices have fallen by 32% YTD (year-to-date) due to long-term oversupply concerns. Will the US crude oil inventory report lead US crude oil prices to follow the long-term trend? We’ll look at this in the next part of this series.

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