Expectations of a buildup in U.S. oil inventories will keep the price of benchmark WTI (West Texas Intermediate)crude under pressure this year, says one commodities analyst, who recommends investors take advantage of the widening spread between WTI and the London-traded Brent oil prices.
“U.S. crude inventories have been on the rise for the last two weeks and thechannel for the U.S. to ship out crude is not ready yet due to infrastructure issues, so inventory could pile on,” Ker Chung Yang, Commodities Analyst at Phillip Futures, told CNBC.
Over the past two weeks, U.S. commercial crude inventories have risen by 16.1 million barrels - the biggest 14-day increase in more than a decade. The American Petroleum Institute (API) is due to release the latest inventory numbers later Tuesday.
While Ker expects WTI crude prices to move lower to $95 a barrel by the third quarter, which marks a seven percent downside from current levels, he expects Brent prices to hit $135 a barrel over the same time period – 10 percent higher from current levels.
Discussing how investors should take advantage of expectations of further divergence in the direction of WTI and Brent crude, Ker recommends shorting the former and going long on the latter.
In March, the Brent-WTI spread widened, averaging $24.6 a barrel compared with $21.8 a barrel in February.
“Geopolitical risks in Iran and the Middle East will continue to support Brent, that’s something we are closely watching,” he said. “Supply problems in the North Sea are another reason why Brent will move higher.”
Nuclear negotiations between Iran and the five permanent members of the United Nations Security Council, starting April 14 in Istanbul, will be the next key risk event for Brent crude, say market watchers.