Friday, September 16, 2011

Phil Flynn: Prime The Pump And Bailout The Brent

Oh sure, now you go and bail out Europe and drive the Brent Crude versus West Texas Intermediate spread back above $25 wide! Brent crude gets pumped up as global central bank pumps dollar liquidity in to European banks. The reduced risk of bank default and kicking the Greece default can further down the road had the Brent crude supply demand fundamentals tightened in a minute.

The decision of the five largest central banks to dump dollars into European banks added to the support for oil but created fears of a tightness of supply in the Brent. Weak production from the North Sea and conflicting reports on the return of Libyan crude seems to be adding to the Brent woes. There is some short term confidence coming out of the Euro zone and this will increase demand or at least expectations of demand almost instantly.

The spread between Brent crude and West Texas had previously come in, especially after U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum reserve) fell by 6.7 million barrels which put US supply at 346.4 million barrels which is still well above the five year average.

Robert Campbell of Reuters News says writes, "Looking back at the impact of the Libyan civil war on the oil market the most remarkable fact is that the situation did not lead to an oil super-spike. After all, a scramble for sweet crude in 2007 is widely seen as the trigger for the spiral in oil prices until they hit nearly $150 a barrel. Although the data are still coming in, it would appear that the Atlantic basin refining sector is now more flexible, in part due to weaker demand and in part due to investments in new capacity. Sweet refiners may be suffering because of high crude costs, but the system as a whole is not breaking down."

He goes on to say, "The resilience of the market is all the more impressive once the other supply disruptions to the European short haul sweet crude market are considered. Normal decline of the aging fields in the North Sea is well known, as is the extraordinary sequence of problems at several important production facilities in the area. Less discussed is the reduction in crude oil production in Azerbaijan, an important supplier of very low sulfur crude.

Combined with the conflict in Libya a huge amount of sweet crude oil production was lost to European refiners, many of which rely on short haul cargoes. In the first half of the year sweet crude output from Azerbaijan, Britain, Libya and Norway was 215 million barrels less than in 2010. With this number in mind, the response of the International Energy Agency to the crisis.....a release of 60 million barrels of strategic stocks, seems almost timid. Doubtless, the IEA would argue that the problems in Azerbaijan, Britain and Norway were not the classic supply disruptions the agency is meant to guard against."

Posted courtesy of Phil Flynn and PFGs Best. You can contact Phil at 800-935-6487 or email him at Get the "Power to Prosper" by tuning into the Fox Business Network where you can see Phil every day!

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