Oil spot price: WTI undermined by FOMC stance

The price of West Texas Intermediate (WTI) crude oil has today continued its downtrend from 28 August, following a sharp downtick yesterday fuelled by diminishing prospects for further postponement of US QE tapering. The Brent crude oil price has also declined in trading so far today, after dropping from an 8-day high yesterday as market appetite for risk assets shrank following the FOMC statement.

FOMC statement

The current-month FOMC statement came out less dovish than many investors had been expecting, inasmuch as it did not close the door on a December US QE taper. The broad view in the markets is that the Fed won’t start reducing the pace of asset purchases until the first quarter of 2014 and many commentators had thus expected the Committee to rule out any start to tapering in the remainder of the current year.

It’s been something of a surprise therefore that the FOMC statement keeps all options on the table, a happenstance which fuelled a sharp rally of the US dollar while WTI futures tumbled.

The notion of easy-money policies being scaled back earlier than expected (see chart below) could extend the “pullback in risk assets in the near future”, according to a note by Credit Agricole.

The WTI contract for December delivery on the New York Mercantile Exchange (NYMEX) had at 12:35 UTC today given up 0.65 percent to be at $96.14 a barrel.

Brent’s premium over WTI close to 7-month high

Brent for December settlement on the ICE Futures Europe exchange has today declined by 0.26 percent, being at $109.56 a barrel as of 12:35 UTC. Notably, the European benchmark crude reached a premium of $13.42 to WTI, which is an almost seven-month high.

The Brent/WTI spread widened by $2.28 yesterday in the biggest shift for Brent crude in two years. The price difference in 2013 has swung wildly from a $23.44 advantage for the European benchmark crude to an 8 cent premium for WTI.

Kyle Cooper, director of commodities research at IAF Advisors in Houston, observed today that “there’s an awful lot of crude in the U.S. as a whole and at Cushing, which is putting pressure on WTI, while the problems in Libya are pushing Brent higher”.

Additionally, data released yesterday showed that private sector job creation in the US appears to be decelerating, adding to prospects of diminishing demand for crude in the United States.

Factoring in supply constraints in Libya and backup supply in the US, Tom Finlon from Energy Analytics Group LLC believes that “a move of more than $2 seems excessive.”

Natural Gas and seasonality

According to Signal Financial Group, natural gas futures are showing the energy markets’ second highest seasonal accuracy. The chart above illustrates the 20 and 30-year seasonality charts, which posits a drift higher for natural gas prices by the end of November before the peak winter demand in the Northern hemisphere.

Futures for December settlement are currently (as of 12.30 UTC) changing hands at around $3.651 per million British thermal units, up 0.84 percent intraday.