Chart of the Day: Oil is oil

Today’s chart plots the widely quoted West Texas Intermediate Crude (WTI) price against the ICE Brent Crude price since the early 2009 low following the GFC (non-Australian readers call this the Great Recession)

The chart shows the recent divergence, whereby the former corrected alongside other “undollar” assets, whilst ICE Brent remained resilient has now closed, with WTI rallying hard to catch up:

ICE Brent is forming a six month long bullish “flag” pattern, which indicates another possible leg up in the not as sweet and light energy source. Readers at MacroBusiness recently debated the efficacy of following WTI as Brent may provide a better barometer of energy price inflation, but the chart does show a meaningful correlation between the two markets.

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  1. Prince, there was also a story about Saudi backing off production.

    I’d agree that we should see higher oil prices for a number of reasons, what is your view on oil if we get a global recession? Normally that would push prices down, but with Saudi/OPEC intervention, and reduced demand (maybe)…

    • a63,

      The Saudis (who are also world swing producers) need oil around $85 a barrel to pay for social programs (bribes to domestic population) and a coterie of 5,000 princes.

      They’ve said and shown they would do that with production cuts. If demand/price was to fall significantly, they would and have backed off production till they got to that price point, or above.

      Where oil is selling above this price they are happy to produce at current levels, but can’t really scale up more than that to prevent the world economy from taking a tailspin, because they don’t really have much more to produce for both geological and technical reasons.

      • Thanks Mercury4. I’m researching oil at the moment for possible investment, and I’m concerned not so much about the Saudi’s but if we have a global recession (quite possible) oil will fall I’m expecting. I’ve never looked at oil before so all my assumptions might be wrong.

        • Oil, as well as other commodities and commodities tied currencies, like the AUD, will take a big hit in advent of another global downturn. Just like in 2008. In that case look for the Saudis to cut production deeply then, as they scramble to raise the price again.

          As the Saudis produce the most conventional oil for export they will attempt to keep a floor in the price above $85. For that reason we will never, except briefly, see cheap oil prices again. Even in the wake of a recession/depression.

          • Thanks again. I invest in other commodities, but as we’re past peal oil I’ve started looking at it now as one of the areas I’ll invest in as some point.

          • The long term floor will be around $85, but like all markets oil will likely go below that level before returning. At $85/bbl, unconventional production becomes marginally economic while below that level will result in the lack of development of unconventional resources.

            Oil will also have a ceiling around $130/bbl, again it’ll move through that level, but the sweet spot is $85-130/bbl. This range is high enough to produce good revenues for the OPEC nations and low enough not to cause demand destruction. If you’re going looking for massive profits above $130, then be nimble – as once the price starts to turn, it’s going to fall hard.

  2. The impact of Libya returning has had a big impact on Brent, reducing the expectations of a continuing strong price. Meanwhile, WTI has strengthened due to the reversal of Enbridge’s Seaway pipeline which will allow WTI to get out of its landlocked status and into the Gulf of Mexico.

    Historically, Dated Brent has traded at a discount to WTI (it is imported into the US and price is impacted due to a freight discount). However, this year, with the Libyan crisis knocking out a large chunk of light sweet seaborne crude, Brent jumped while the landlocked WTI stayed still.

    The advent of shale liquids in the US will further change the dynamics in coming year, and may well prevent, or at least limit, an oil spike.

    • There is no mention of depletion in existing fields which is running about 4% p.a. at all in this article. Stating that a country’s production may rise by 1 or 2 mbs p/d without mentioning this is just plain naive.