Schork Oil Outlook: Bulls vs Demand Fundamentals
We are two weeks in to the year and the oil and gas markets in New York and London have established opening ranges.
The top of the current range in New York for the market in crude oil looks to be in the area of 93.80 with a bottom of around 88.90. As far as Henry Hub gas futures are concerned, the market has thus far settled in to a range from 4.70 and 4.30. Meanwhile, in London the market for Brent crude oil has been defined by 99.50 at the top and 92.75 on the bottom. As far as the North American natural gas market goes, we are now at the coldest stretch of the winter.
Be that as it may, spot prices are entrenched well below the $5 mark. That is all you really need to know in regard to the pathetic state of this market.
On the other hand, the oil markets are emitting mixed signals, i.e., the contango in London (Brent) has flattened, while the contango in New York (WTI) has increased. Over the last month WTI’s discount to Brent has blown out by 118 bps to 3.1% or from $4.08 a barrel to $6.87!
Given that WTI historically trades at a $1.50 premium to Brent, some may surmise a mean reversion is nigh. Perhaps, but is all depends on your definition of nigh. After all, regardless of how illogical you may think the current relationship is, who is to say (neither you nor we) this structure cannot outlast you or us?
The gasoline blending season is only a couple of weeks away, but for the reason stated last week (The Schork Report -January 11), it would be foolhardy to assume (remember Felix Unger) WTI will rally against Brent anytime soon. More to the point, icy road conditions are hardly conducive for transportation consumption.
In this vein, demand in the here-and-now is suspect. Physical cash markets have decoupled from spot Nymex quotes as a result. For example, unleaded gasoline in Chicago plunged to more than a dime discount to the Nymex towards the end of last week. That is more than two times the seasonal norm. At the same time, the physical heating oil market in New York Harbor (?2>5×10-4) closed last week at a 0.85 discount (1.4× normal) to the Nymex contract.
The diesel market in Chicago plunged as well; dropping to a 63 cent discount to the Nymex. In case you were wondering, Chicago diesel trades at a premium to the Nymex 7 out of 9 times in January.
As written in today’s issue of The Schork Report , we have changed our bias, as nearby demand fundamentals do not favor the bulls over the next couple of weeks.
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Stephen Schork is the Editor of The Schork Report and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.