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There’s been movement in crude oil prices in 2013 that investors should be watching…
Global oil prices diverged yesterday (Tuesday) as market factors both in the U.S. and abroad painted a very distinct picture for energy costs.
Options for West Texas Intermediate (WTI) for September delivery fell $2.14 to settle at $104.96 a barrel on the New York Mercantile Exchange.
This was the sharpest price drop since June 20.
Meanwhile, Brent prices for October delivery rose 0.2%, and ended trading at $110.15 per barrel in London.
That means the spread between the two varieties of crude has now reached a new high since July, and marked a reversal of a six-month squeeze in the WTI/Brent oil price spread.
Although WTI prices recently approached par with Brent prices, the spread jumped more than 100% Tuesday to $5.04 per barrel.
And it will keep rising.
In fact, we see it rising anywhere between $8 and $10 by the end of the year.
The reasons for a sudden change to the spread point to a few other factors that could have a profound impact on energy investors…
Why Oil Prices Have Diverged in the Last Three Years
First, to understand how to profit from crude oil prices, investors need to know what prices mean and what drives them.
The oil price spread between WTI and Brent crude is a measure of the cost differential between two international prices.
WTI is priced at the NYMEX in New York and is the domestic U.S. price, while traders set the Brent price in London.
Despite similarities in quality and sourcing (WTI contains less sulfur and is cheaper to refine), Brent prices had been significantly higher throughout 2012 and most of 2013. The Brent premium to WTI jumped as high as $23 per barrel earlier this year – but rising WTI costs drove this spread to a mere two cents on July 19.
The primary source of this spread decline came from increases in WTI oil prices, which have rallied more than 27% from a low of $84.05 a barrel on Nov. 7.
The surge in 2013 oil prices for WTI stems from three primary factors:
- An expansion of U.S. oil infrastructure: The addition of multiple crude oil transportation systems began at the start of 2013. A series of pipelines and rail terminals have helped reduce a glut of oil inventories across the country. By reducing the bottlenecks at Cushing, OK, producers can now move greater production levels to market much faster.
- Refinery networks reach near-record production levels: By expediting crude refining across the country — nearly 16.1 million barrels per day — processing crude has reduced gluts and helped elevate prices as the summer months carried on.
- Increased access to WTI resources: As noted earlier, WTI crude is lighter, contains less sulfur, and is easier to process. As U.S. refiners have enjoyed greater access to such resources, demand for WTI has replaced some Brent imports to our refining networks. This has driven demand for WTI higher while suppressing Brent prices.
Now those factors are being met by one important player in the markets: The Federal Reserve.
Today (Wednesday), minutes from the Fed’s July meeting showed that the QE taper will likely start in 2013.
Concerns surrounding Fed QE tapering – plus a mild hurricane season – have tempered WTI forecasts.
The Energy Information Administration (EIA) projects that WTI prices will soon fall below $100, and average approximately $98 for the rest of the year.
But Brent crude, on the other hand, will be on the move…
A Bullish View on Global Crude Oil Prices in 2013
According to research from Goldman Sachs (NYSE: GS), international oil inventories have tightened significantly, while refinery rates to process crude have declined for four consecutive weeks.
This reduction in refinery rates suggests that domestic demand is waning as summer ends.
Also from Goldman Sachs this week: A projection that Brent oil prices could increase to $115 per barrel. Analysts stated these global events will drive the increase:
- Disruptions in Libyan oil supplies remain the highest concern in the international markets. Labor unrest has dropped the nation’s production to its lowest point since the 2011 civil war. Libya’s daily production of Brent crude has plummeted from 1.3 million barrels per day (bpd) in June to roughly 400,000 bpd this month.
- Meanwhile, Iraq has been unable to increase its production levels due to maintenance at its southern export hub. The International Energy Agency has suggested the ongoing work could reduce the nation’s oil exports by 500,000 bpd for up to six months. Iraqi oil ministers have denied the impact, but that hasn’t stopped analysts from factoring it into their forecasts.
- Finally, the turmoil in Egypt is driving concerns about access to the Suez Canal – one of the most important avenues of international trade in the world – which also will push prices for Brent crude higher.
Supply concerns out of the Middle East could have driven oil prices even higher if worries over a weak global economy weren’t increasing – again.
Bottom line: Investors should expect an increase in the WTI-Brent spread as Brent soars. Oil prices will eventually stabilize as Libya overcomes unrest, and Iraq completes crucial exporting projects…
Now to find out how to invest in oil, Money Morning Global Energy Strategist Dr. Kent Moors explains where to put your money…
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