The Week In Hindsight; 27 June 2014

Brent crude eased back from recent peaks this week despite that insurgents in Iraq continued to seize new territory. The Brent price has gained over $5 from trough to peak throughout June as fears mounted that supplies from OPEC’s second largest crude exporter would be disrupted.

So far output from the nation remains stable as much of the fighting has been restricted to the north and west of the nation, which has eased market concerns for the time being. However; militants have closed the gap between the Northern battlegrounds and the Capital Baghdad.

The closing of this gap, in our view, is what lays the foundations for further volatility throughout the weeks ahead as many of the nation’s key oil fields are in the South, just past the capital. Should insurgents make further advances toward this area then it is likely that concerns over output could, once again, continue to rise.

At present, international intervention, that goes further than words of support, has not been forthcoming. This is likely to remain the case given the refusal of the current Iraqi Prime Minister to either resign or set to work building an inclusive government which provides a voice for both Shi’ite and Sunni muslims.

As a result we expect the conflict to continue for the time being with minimal assistance or intervention from the international community. This creates the risk that insurgents could expand and strengthen their presence in the country. The ultimate consequence of this is most likely to be an increased and persistent threat to oil production and exports.

Consequently, we see Brent prices remaining elevated throughout the days and weeks ahead. While the recent pullback could extend further into the coming week, we expect strong support at, or around $110.00, in the event that the $112.00 level gives way.

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New export licenses provide a boost to WTI Crude, rising inventories drive benchmark to lower close on the week

Two US energy companies were granted licenses to export light crude with a lower refinery grading this week, leading some traders to begin betting that the US government could be about to relax its long standing export ban.

The news boosted the price of WTI for a short time before the EIA unveiled a larger than expected increase in inventories (stockpiles) in its weekly report. This led WTI futures to close lower on the week, slightly above the $105.00 level.

At the open of the week, North American crude looked set to advance further, as better than expected housing and consumer confidence data appeared to indicate gaining momentum behind the US economic rebound. However, a larger than expected downward revision to Q1 GDP figures called a halt to bullish bets as many traders and investors began to question their own assessments of US economic growth for 2014.

Going forward, next week’s US manufacturing and employment numbers are likely to form the headline act for the next seven days. Any under performance in these could see the oil benchmark remaining under pressure, whereas a continued rebound in employment could also lead to further gains.

Regardless of the outcome with employment, the rate of drawdown upon inventories in the US remains erratic and as a result, the need to tap international markets over the months ahead cannot be completely ruled out. Consequently, we expect the ongoing threat to global supply posed by Iraq to continue to underpin WTI crude at, or above, $103.00 per barrel.

Brent Crude at 10 Minute Intervals

Brent

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WTI Crude

WTI