Could the Spread Between Brent and WTI Skyrocket Fueled by Egypt Events?

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Events in Egypt and the potential  for this unrest to overflow to the neighboring regions sparked a disturbance among commodity analysts. A lot of analysts kindly added fuel to the public speculations that energy markets were facing a tremendous blow. Some of them were seeing the danger resulting from cuts in oil production in the Middle East. Others prophesized the shutdown of the main transportation artery, the Suez Canal. This water passage, while governed by the international treaty, Constantinople Convention of the Suez Canal mandating the use of the water passage “in time of war as in time of peace, by every vessel of commerce or of war, without distinction of flag” is still geographically located in Egypt, and who knows…

Yet, now with the conflict almost resolved, we can look back and try to find out whether all that commotion was justified.

I am not a political analyst and would not dare to go into the guesswork and to take sides in this area. I am a technical analyst, who has been fortunate to have an access to the whole expanse of market data through the ZE’s software ZEMA, allowing me to run historical analysis. Which I do.

One of the market indicators supposedly being driven by Egyptian tensions is a deepening gap between Brent and WTI oil prices. To verify whether all those speculations about the impact were well-grounded, let’s look at the WTI and Brent spot prices, as well as differentials between them from 1987 till now:

Until 2006, WTI and Brent benchmarks were moving quite close to each other, hardly ever parting by more than US$3/Bbl. What happened between 2006 and now? Let’s leave this discussion for later postings… but for now, let’s look at the last three months’ prices, spot, as well as near-month futures.

Surely, the spread reached about US$14/Bbl since the beginning of escalation. However, it started to depart from the usual $3 level in the beginning of January, 2011. It looks like this spread has been receiving contribution from both benchmarks. This leads us to believe that there were other drivers besides Egypt events. To see what actually created similar gaps in the past, we have to look back. Was it USD exchange rate, inventory levels, production, speculation, or geopolitical pressure? Look for the next postings.

(Written with contribution from Vera Tikhomolova).

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