HardAssetsInvestor

Written by Sumit Roy  |

May 09, 2012

Crude Oil Report: More Downside Remains For Over-Sold Oil, WTI-Brent Spread To Remain Wide

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The correction in crude oil is not over, but the short-term outlook is uncertain.

The Department of Energy reported this morning that in the week ending May 4, U.S. crude oil inventories increased by 3.7 million barrels, gasoline inventories decreased by 2.6 million barrels, distillate inventories decreased by 3.3 million barrels and total petroleum inventories increased by 1.5 million barrels.

Already lower on the back of economy and debt concerns, crude oil prices barely flinched in reaction to the latest inventory figures from the EIA.

Though other commodities and stocks continued to fall this week, crude has largely been steady in the period, as Brent and WTI attempt to hold above $110 and $95, respectively.

BRENT

WTI

Whether oil rebounds from here or falls further will, in the short term, likely depend on movements in broader financial markets. We are in the midst of one of those periods in which all risk assets tend to move in tandem, and that strong correlation will last as long as bearish news flow dominates the headlines.

In the medium term, however, our view is that crude oil may continue to decline, as surging production in the United States and OPEC dampens supply concerns from earlier this year related to geopolitical hot spots such as Iran, Sudan, Yemen and others.

The natural target for Brent is $100, where a layer of solid support lies. That would correspond to $84 on WTI based on the current differential between the benchmarks.

Incidentally, it is our expectation that the spread between Brent and WTI will stay wide amid rapidly growing output in the U.S. Midwest. Indeed, crude production in the U.S. hit a fresh 13-year high last week.

The reversal of the Seaway pipeline at the end of the month will not be enough to alleviate the glut of oil in Cushing, Okla., and the broader Midwest.