Oil prices staged a modest rebound on Thursday but the spread between the market’s main US and European benchmarks remained at record levels, posing problems for many investors in commodity markets. Gold remained rangebound above the $810 level but base metals were mixed.
Price volatility across commodity markets was markedly lower on Thursday as risk appetite remained weak in the face of ongoing deterioration in global economic activity and renewed concerns about the health of the global banking system.
In the oil market, Nymex February West Texas Intermediate rose 59 cents to $37.87 a barrel, trading in a narrow range between a low of $36.13 and a high of $37.91.
The large spread between the February WTI contract, which is due to expire on Tuesday, and the March WTI contract persisted. March WTI contract traded 55 cents higher at $44.74 a barrel.
The large Feb/March spread has prompted oil traders to describe the February WTI contract as “disconnected” from the rest of the forward prices curve. Some traders expect further downward pressure on the February contract ahead of expiry as crude stocks at Cushing, Oklahoma, the delivery point for WTI, have reached 33m barrels, the highest level since records started in 2004.
Cushing’s maximum storage is about 42.2m barrels, but only 80 per cent (about 34m barrels) is operable capacity, according to Platts, the oil pricing agency.
Cushing is the hub of America’s oil pipeline network, acting as the delivery point for the WTI futures contract traded on Nymex. Cushing inventories have a direct impact on WTI prices, sometimes overshadowing global supply and demand trends.
Meanwhile, ICE February Brent, which expires at the close of Thursday’s session, rose $1.44 to $46.52 a barrel while the March Brent contract added $1.58 at $49.20.
European and Middle East crude prices have been supported by mounting evidence that Opec’s supply cuts have tightened the market. Historically, Brent which is a lower quality crude than WTI trades at discount to the US benchmark. However, the stock rise at Cushing has brought massive downward pressure on US crude prices.
As a result, the price spread between the world’s two main oil price benchmarks – West Texas Intermediate and Brent – has reached record levels, widening to more than $9 a barrel on Thursday.
The rare divergence is causing substantial losses to commodities investors, particularly those in long-passive indices such as the S&P GSCI, popular among pension funds, which is heavily weighted towards the WTI contract.
The main talking point of the latest US weekly inventories data which was released on Wednesday was a huge jump in distillate stocks (including heating oil) which rose 6.4m barrels, well above the consensus forecast for an increase of 1.1m barrels. Nymex March heating oil traded 4.4 cents higher at $1.5059 a gallon on Thursday.
Some traders attributed the rise to refiners boosting production of heating oil in anticipation of colder weather, but others felt it indicated weak demand.
Profit margins for US refineries have spiked higher (mainly as a result of crude prices dropping) and refinery utilisation rose 0.6 percentage points to 85.2 per cent.
Overall US consumption displayed renewed weakness, with total product demand averaging 19.72m barrels a day over the past four weeks, down 4 per cent compared with the same period a year ago.
On Thursday, gold traded at $810 a troy ounce, moving in a narrow range between a low of $808.40 and a high of $814.30.
Among the base metals, copper and aluminium remained under pressure as stocks of both metals continued to register substantial increases, reflecting weak demand conditions.
Copper fell 2.8 per cent to $3,277 a tonne after a large rise of 5,175 tonnes in London Metal Exchange stocks, which have reached a five- year high at 387,325 tonnes.
Aluminium eased 1.7 per cent to $1,489 a tonne after LME stocks jumped by a hefty 33,600 tonnes to 2.79m tonnes, the highest since mid-1994.
