‘Iraq conflict, Trump keep diverging crude prices apart’

Geopolitical risk is helping to maintain a divergence in the prices of the two main crude benchmarks that began as Hurricane Harvey threatened the US, according to Mark Keenan, global commodities strategist at Societe Generale.
Brent and West Texas Intermediate futures have been rising since they plumbed to this year’s lows in June. However, while Brent has eliminated earlier losses and is now 2% up on its price at the start of 2017, WTI is trailing and remains below its January 1 level.
The geopolitical risk centres on conflict in oil-producing areas in northern Iraq and US President Donald Trump’s tougher rhetoric on Iran, Opec’s third-largest producer. Brent is particularly sensitive to geopolitical risks because it is more representative of global fundamentals, whereas WTI is more US-focused, Keenan said. The heightened interest in Brent is a result of its more bullish fundamentals and the fact that inventories in the US remain high relative to the rest of the world.
Harvey’s landfall in August led to the closing of a number of refineries in Texas, pushing up inventories. Some market participants who had taken speculative long positions in WTI as the hurricane approached quickly exited them, said Keenan.
This happened as it became better understood that the growth in shale had changed the oil supply landscape in the US, with less oil production in the Gulf of Mexico. Many traders also took short positions in WTI against long positions on products such as gasoline, as refineries were disrupted.
“The short-selling concentrated in WTI, which put disproportionate downward pressure on WTI relative to Brent,” Keenan said by phone on October 19. At the same time, supplies of Brent were tight after storms in the North Sea disrupted loadings from production platforms. In addition, flows of Brent from the Atlantic basin to the Asian market had increased.
“That caused the initial move in the arbitrage, and latterly it’s been driven by geopolitical risk,” Singapore-based Keenan said. “Geopolitical risk is becoming more important given that the market is rebalancing and inventories are declining - tighter inventories reduce the cushion to insulate prices form supply shocks.”
The price gap has coincided with contrasting levels of speculative interest in the two benchmarks, according to Keenan.
“There is much greater speculative money-manager interest in Brent relative to WTI,” he said. “This is a divergence that we haven’t seen for many years.”