Tuesday, February 7, 2012

Brent-WTI spread wider on Iran fears and US supplies

Brent-WTI spread has blown out again with strong momentum to the upside. Just this morning WTI and Brent crude futures are diverging by some $1.20.
Brent-WTI Spread (Bloomberg)

On the WTI side we are seeing concerns over high inventory levels in the US.
Bloomberg: U.S. crude inventories probably rose to the highest in more than four months and gasoline supplies climbed for a second week, according to a Bloomberg survey before an Energy Department report tomorrow.
Crude oil stocks (inventory levels) are at the upper level of the 5-year range and expected to stay there.

Source: EIA

Gasoline stocks are at their 5-year highs as well, putting some downward pressure on WTI.

Source: EIA

On the other hand Brent is bid up due to geopolitical issues, particularly concerns over an increasingly desperate Iran. As much as Iran dismisses the recent sanctions against them, the nation's economy is spiraling down. With inflation running above 20%, the probability of further social unrest is rising. After all, food inflation sparked the Arab Spring a year ago.
Reuters: Rice exporters said Iranian buyers had defaulted on payment for 200,000 tonnes of rice from their top supplier India in another sign that Western financial sanctions are disrupting trade, even in one of Iran's food staples.

While a plunging rial has made forward purchases costlier, the sanctions are hampering Iranian traders who have used Dubai-based middlemen to keep paying Indian rice suppliers.

Grain ships are docked outside Iranian ports, traders are not booking fresh cargoes and exports of staples to Iran such as maize are falling due to problems collecting payment from buyers. Maize is used widely to feed livestock and shortages, when they work their way through, could force farmers into stress slaughter.
Anecdotal evidence suggests numerous Iranian families now unable to buy food. The regime will become increasingly belligerent externally in order to suppress domestic issues. This may put additional upward pressure on Brent crude, widening the spread further.
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