Watch out: WTI-Brent spread is narrowing
It is said that the market climbs a wall of worries, and there is much to worry about globally: European Bank debt crisis that never seems to be resolved though the Euro higher ups always declare victory after each eruption; the U.S. debt crisis just gets larger every day; the U.S. housing market, is it in recovery mode or exactly how does one define a recovery?; Europe is in recession; U.S. GDP is on life support.
I could go on, as the macro list of worries rolls along, but let's look at the immediate data. Crude supplies rose again this week by 2.7 MM barrels (bbl) higher than analysts expected - 0.2 MM bbl. Gasoline supplies declined less than expected, distillates fell more than expected, and refineries ran a bit more than expected as more refineries return from winter maintenance and begin to gear up for summer gasoline production.
However, gasoline demand has begun to slide from its earlier higher demand in the beginning of the year from last year; over the four-weeks ending in March of this year demand declined slightly from the comparable period last year, and this as the weather begins to moderate.
More surprising, though it should not be, is that the WTI-Brent differential has collapsed from over $20/bbl as recently as the end of February to between $13.00 and $14.00/bbl. Since the beginning of the year WTI has increased 3% in price while Brent has fallen by a like amount, and the WTI-Brent spread has narrowed by 34%. Why? Well earlier this year Brent production was constrained due to pipeline issues that are now resolved and we are seeing more Brent supplies and that coupled with Europe deepening in recession is weighing on its price.
WTI supplies out of Cushing OK have begun to increase to Gulf Coast refineries aided by the reversal of the Seaway pipeline -- a 50/50 joint venture between Enterprise Products Partners (EPD), the operator, and Enbridge Inc. (EEP) -- and Magellan Midstream Partners' (MMP) Longhorn pipeline reversal moving crude from West Texas to the Gulf Coast.
Absent an immediate Mid-East Crisis erupting, the spread will continue to narrow with WTI moving closer to Brent price levels and Brent itself moving lower. Technically, WTI is a nose above a bullish formation, rising above its 50-day and 200-day moving averages, with the 50-day above its longer-term 200-day average; we would need the 200-day average to begin to slope upward to strengthen a longer-term bullish trend for WTI. Right now, the wild card that could cause WTI prices to move lower longer-term would be the U.S. economy growing under 2% closer to 1%.
Although natural gas (NG) remains in a longer-term bullish formation with its spot price, 50-day and 200-day trends all pointing higher, nevertheless NG has begun to pull back, and much of the upward trend has been the colder March weather and its ability to delay warmer weather. But if we have a cooler summer, expect NG prices to retreat later in 2013.
But for now the energy market as measured by the S&P 500 energy index, the XLE, continues to climb higher; over the last three months the XLE has outperformed the broader S&P 500 market. How long this will continue is uncertain, but I expect that over the longer-term the broader S&P 500 will outpace the XLE as it has done over the last rolling twelve months. But for now, the XLE is technically in a bullish trend.
So while there remains some bullish sentiment for energy stocks, the wind to our back may be softening. Be careful out there and lock in your stop losses and manage the downside.
