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At $91.70, front-month WTI crude prices have dropped to a fresh 7-month-low this morning. The mainstream media is already crowing of what this means for gas prices and how that will be an implicit “tax-cut” – even though gas prices remain at or near record-high levels for this time of year. The issue with this thinking, of course, is Brent crude (which more closely correlates to US gasoline prices) remains stubbornly high at around $107 as the spread between WTI and Brent surges over $15.
West Texas Intermediate traded near a two-month high above $100 a barrel after U.S. crude and distillate stockpiles fell more than forecast, while exports from Libya remained curbed by port closures.
Futures were little changed near the highest settlement since Oct. 18. Crude inventoriesdropped by 4.73 million barrels to the lowest level since September last week amid an increase in refinery operations, while distillate supplies, including diesel and heating fuel, fell by 1.85 million barrels to 114.1 million, the Energy Information Administration reported Dec. 27. A possible agreement with rebels to reopen the Libyan port of Hariga collapsed, the oil ministry said Dec. 28.
“The recovery of the U.S. economy is fueling expectations of higher oil demand in the U.S.,” saidOlivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland. “Distillate stocks will end 2013 at a multi-year low for the season and that should translate into very low stocks by spring.”
WTI for February dropped 7 cents to $100.25 a barrel in electronic trading on the New York Mercantile Exchange as of 11:43 a.m. London time. It closed at $100.32 on Dec. 27, settling above $100 a barrel for the first time since October. The volume of all contracts traded was about 56 percent below the 100-day average. Prices have climbed 9.2 percent in 2013, set for a fourth annual gain in five years.
Brent for February settlement was down 2 cents at $112.16 a barrel on the London-based ICE Futures Europe exchange. Prices have advanced 1 percent this year. The European benchmark crude was at a premium of $11.91 to WTI. The spread closed at $11.96 on Dec. 27, narrowing for a third day.
While there is currently no deal to reopen the port of Hariga, negotiations with rebels holding the terminal continue, Ibrahim Al Awami, head of measurement and inspection at Libya’s oil ministry, said by phone Dec. 28. The country is pumping 233,889 barrels of crude a day, compared with a daily capacity of about 1.6 million, the oil ministry said Dec. 21.
WTI has increased 8.2 percent in December amid reduced crude stockpiles in the U.S., the world’s biggest oil consumer. The country will account for about 21 percent of global demand this year, according to the International Energy Agency.
Crude inventories slid for a fourth week to 367.6 million barrels, according to the EIA, the Energy Department’s statistical arm. A median decline of 2.65 million barrels was forecast by analysts in a Bloomberg News survey. Refineries operated at an average 92.7 percent of capacity, the highest rate since July 12. Consumption of distillates climbed 2 percent to 4.17 million barrels a day.
“We saw some strength on West Texas based on the better-than-expected figures” from the EIA, Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone today. “There’s potential for the market to rally further if it gets more good news. The U.S. may see further improvement in economic statistics in the next few weeks.”
The EIA will next report weekly data on inventories and demand levels on Jan. 3, two days later than normal because of the New Year holiday.
Brent will drop for a second year in 2014 as U.S. oil production expands and supply threats ease in the Middle East and North Africa, a separate Bloomberg survey showed. Futures will decline to $105, down from $108.70 in 2013, according to the median estimate of the seven analysts who most accurately predicted this year’s level. Prices averaged $111.68 in 2012.
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Predictive relationships appear to occur between large, rapid swings in oil price and recessions, stock market crashes and shifts in political polls, as I have previously discussed in articles published in 2010 and 2011. Given the economic disruptions that nearly always happen in the aftermath of oil shocks, it seems important to understand what is behind the timing of transient instabilities in the oil markets.
Last time, I examined whether repetitive patterns could be found in the ebb and flow of oil price changeability (volatility) between 2000 and 2010. To do this, I calculated rolling standard deviations (for explanation, please see Figure 2 in this post) for a 120-month series of monthly oil prices starting from January 2000. A mathematical tool called Fast Fourier Transform then scanned for repeating patterns in this rolling 10-year sequence.
What I found was that from the mid-2000s, changes in oil price showed evidence of a multi-year oscillation. This pattern was marked by a single dominant frequency that peaked at 2.8 years (~32 months). In other words, during the first decade of the new millennium, volatility in the price of oil appeared to spike every two to three years.
Confirming the potential emergence of a long-term rhythmic pattern, oil price variance spiked again in April 2011, precisely 32 months after the last major round of volatility had topped out in July 2008.
It is coming up on 30 months since the now largely forgotten market turbulence of mid-2011. If oil price volatility is oscillating in a repeating two to three-year cycle, then can we expect to see another wave of instability in oil prices occur in late 2013 or early 2014.
Oil price has lately begun showing signs of increased twitchiness — although the increase in volatility is so far modest. Recently, a crisis triggered by the use of chemical weapons in Syria, is the cause du jour that is being blamed for oil prices ramping up from the mid US$90s to over US$110 per barrel — an explanation that I find doubtful, by the way.
It remains to be seen whether the oscillatory signal described in my 2011 article will continue into the future. However, I have used oil price data that has accumulated since my earlier articles to extend the analysis, presented below.
To improve resolution of changes in oil price volatility over the last 10 or so years, I used a slightly different approach. Instead of scanning through monthly averages, a rolling 3-day standard deviation was calculated using daily prices of West Texas Intermediate (WTI) crude oil from 5 January 2004 to 30 July 2013.
The time series for the daily price of WTI oil (grey line) and its corresponding rolling 3-day standard deviation (orange line) for the period are shown in Figure 1. For those who follow oil prices, the grey line on the plot is all too familiar — distinguished as it is by the scary, vertiginous peak of 2008.
To scan for evidence of repeating signatures in the serrate orange line that traces oil price volatility on the figure, I again used Fast Fourier Transform. The results of this analysis are summarized in Figure 2. From this plot it can be seen that during the last 8 years price volatility has occurred roughly every 2.9 years (33 months).
This 2.9-year estimate for the period between spikes, based on daily oil prices, is in agreement with my 2011 estimate, calculated using monthly prices. Thus, the updated analysis accords with the previous finding — namely, that between 2004 and 2013, variance in the price of oil demonstrated a tendency to spike at a frequency of every two to three years.
Readers of my previous articles will know that I suspect that the “rinse and repeat” volatility cycle suggested by my analyses results from a global plateau in oil production being reached in 2005. I favor the hypothesis that an autonomous (e.g., like a heartbeat) oscillation in price volatility has emerged as a result of imbalances between supply and demand at this production plateau. Interestingly, similar oscillatory phenomena have been noted as an emergent property of predator-prey relationships in nature.
A major new development in the hunt for oil is the rise of “fracking” — the hydraulic fracturing extraction technology that has pushed the United States to the forefront as a major producer. It will be interesting to watch and see whether fracking alters the dynamics of oil price changeability in the next few years — perhaps temporarily damping the amplitude of its oscillatory behavior.
If a new spike in price variance does occur in coming months, then it would pay to keep an eye on stocks, given the tendency of the market to react to oil shocks. Also, if a new wave of instability in the oil market sweeps in, then the 2014 congressional elections could have surprises in store. Stay tuned to this frequency.
- WTI Rises to 16-Month High and Narrows Discount to Brent – Bloomberg (bloomberg.com)
- WTI Surges to 14-Month High on U.S. Supply Decline (bloomberg.com)
- WTI Trades Near One-Week High as US Crude Stockpiles Decline – Bloomberg (bloomberg.com)
- The Oil Market Is Out of Touch With The Fundamentals (etfdailynews.com)
- WTI Surges to 14-Month High on U.S. Supply Decline (bloomberg.com)
- Capital Economics expects Brent, WTI oil price spread to ‘disappear’ (blogs.marketwatch.com)
- Oil prices surge above $105, could impact prices at pump (fox6now.com)
- Oil breaks out of trading range, hits 9-month high (theglobeandmail.com)
- WTI Crude Heads for First Weekly Gain in Four on Demand Outlook – Bloomberg (bloomberg.com)
- Oil Hits 9-Month High As Syria Tensions Escalate (fromthetrenchesworldreport.com)
- WTI Trades Near Two-Week High on U.S. Jobs; Sudan Oil Threatened (bloomberg.com)
- Crude Reaches Two-Week High as US Employment Picks Up – Bloomberg (bloomberg.com)