Tuesday is a perfect day to showcase the reasons Brent and WTI don’t always move towards the same direction, despite what the market is used to.
This week started with a rally that helped both Brent and WTI reach 13-month highs on the back of mainly cold weather in the US and an oil-workers strike prospect in Norway.
Yesterday evening, a deal was reached between the Norwegian Safe union and employers, a development that is naturally bearish for prices.
But now comes the interesting part:
Brent continues to lose some value today as traders have overpriced it, not having expected such a quick resolution to the salary dispute in Norway.
In recent years oil-worker unions in Norway have actually started strikes which have lasted for days before reaching a deal, and the market traded on a similar expectation. Yet the strike was avoided and crude processing in the major Mongstad terminal will not be affected.
As a result, with oil supply unaffected, Brent gains had to be reversed to a certain extent, a natural correction of what was previously priced in.
WTI is on the rise however and the reason is exactly the different price dynamics compared to Brent.
Although Brent is losing some of its gains as Norwegian supply stays stable, WTI supply is interrupted by a cold spell in the US.
WTI prices are rising again, receiving support from by a cold blast in Texas that has caused Permian oil production to decline as the frigid temperatures impact fracking operation and flowback activities.
Nevertheless, we find that the recent price increase might be an overreaction to the recent reported events, as the impact to the supply side will likely be offset by refinery outages.
The arctic conditions have left millions without power in Texas and demand for heating exploded. The combination of increasing demand of heating fuels and refinery outages are likely to trigger a spike in prices across the suite of refined products from diesel to propane.
The new outages will tighten supply for refined fuels as over 3 million barrels of capacity have been now hit. About 2.5 million bpd of capacity was shut between Houston and Louisiana, including the 600,000 bpd’s Motiva Enterprises facility.
All facilities located around the Corpus Christi were affected by the temperatures, adding an extra 750,000 bpd of affected capacity.
Texas’s refinery outages come after nearly 22% of Japan’s refinery capacity was taken offline by an earthquake over the weekend. These outages add headwinds to an already depressed outlook for global refinery crude runs during the first quarter of this year.