Why I was the Recipient of Some Colorful Language in London
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Why I was the Recipient of Some Colorful Language in London

by | published July 10th, 2019

A combination of geopolitical tensions and a large reduction in U.S. shale production is producing another spike in crude prices.

As I write this, West Texas Intermediate (WTI), the benchmark rate for future contracts in New York, is surging up close to $60 a barrel, while Brent (the more widely used global standard set daily in London) is approaching $66.

For the rolling week (adding latest date, deleting earliest), WTI is up 3.9%, while Brent is better by 3.5%) For the month, WTI has moved up 11.8%, Brent has increased 5.8%.

However, as I have noted on a number of occasions here in Oil & Energy Investor, one of the better ways to gauge what is really happening in the oil sector is to focus on the difference between the two benchmarks.

Here’s what I mean…

The Beginning of Hurricane Season Marks a Brewing Storm

For all but a few daily trading sessions since mid-August 2010, the spread has favored Brent’s more international position.

Calculated as the difference calculated as a percentage of WTI – the more accurate way of determining it – the spread gives us a direct measure of broader impacts on oil pricing worldwide.

Here, the difference has remained remarkably double-digit. For the past 60 trading sessions, the spread has been above 10% 58 times, and it is likely to hit that level again today.

The recent spike in WTI reflects the latest balancing in American production prospects, a drawdown on recent extraction surges themselves indicating the restraining influence of excess production on a supply conscious market.

There is also a storm brewing in the Gulf of Mexico as the tropical storm/hurricane season kicks off.

Living in southern Florida, that’s something we are always keeping an eye on.

Both these factors will even out as we move forward. Production levels will creep back up and (hopefully) the storm will be few and low in intensity. Nonetheless, WTI will likely find a new (and higher floor) for prices.

On the other hand, when it comes to Brent, the geopolitical impact remains decisive. The rising crisis in the Persian Gulf, concerns over transport security, the ripple on effect of supply availability concerns, is taking center stage.

This hits Brent first since it is used as a standard for far more global transactions in physical oil than WTI; it is simply a more sensitive barometer.

And that brings me back to my most recent travels.

The Expected and the Unexpected Aspects of My London Meetings

I am still unwinding from a week of energy shuttle negotiations.

The playing field this time around encompassed Iraqis, Emiratis, Europeans, and members of my financing network on one end in London, and Iranians and supporting financial interests on the other in Paris.

Owing to the rapidly deteriorating situation in the Persian Gulf, along with the advancing bitterness coming from Teheran, I ended up spending some four days in the London meetings and barely two hours in Paris.

Put another way, I spent longer getting there on the “Chunnel” bullet train between London’s St. Pancras station and the Gar du Nord in Paris (two hours, sixteen minutes) than I did at the meeting itself.

On both ends I was the recipient of broad-based criticism leveled at current U.S. Persian Gulf policy, even by parties who remain – at least nominally – American allies.

Despite not being a representative (official or otherwise) of the current policy apparatus in Washington, I pretty much expected that.

What I did not expect is the wide acceptance among those with whom I talked of a need to move forward avoiding land mines set up by U.S. policy.

Terms like “unrealistic,” “shortsighted,” “amateurish,” “bullying,” and other, more colorful (but also unprintable), words were thrown at me.

Below the surface, there is another kind of tension forming.

This one addresses the genuine angst among veteran energy marker proponents that the combination of a situation spiraling out of control in a pivotal place like the Gulf and an American view that leads only to conflict will generate the one element they avoid more than any other.

Uncertainty.

Uncertainty Is a Given with Today’s Geopolitical Tensions

Market makers in oil, as in other commodities, prefer predictability over just about anything else. This allows the setting of futures contracts, physical trade, and the arbitrage between the two within less expensive parameters.

That’s because, the more uncertain is the trading climate, the more hedging has to be done to cover risk. Hedging always adds cost to the exercise.

Which is why one important development I found in this trip may be the most seminal of all. This time around, the geopolitical headwinds may have actually resulted in significantly revising how major producers approach the market.

A change in direction is underway. It is likely to provide a more certain basis for pricing crude, just about guarantee that the price slowly improves, and allow for a generation of investment profits.

Even if the Persian Gulf does not explode.

The current Brent-WTI spread is beginning to reflect this new reality.

What is behind the change will be the subject of our next Oil & Energy Investor, so keep an eye on your inbox for my analysis later this week.

Sincerely,

Kent

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