A full retracement is expected in Brent crude oil only towards the end of Q2 as fundamentals improve with refineries returning from maintenance and demand picking up seasonally, stated London based Barclays in its recent market analysis.“The prompt month Brent contract has climbed above $100/bbl again, but the momentum is unlikely to gain further pace from here, in our view, given that fundamentals continue to remain in a transient state of weakness,” it added.
Prompt Brent prices have edged up over the week closing above the $100/bbl mark for every day of the week. According to Barclays view, the momentum upwards was driven by a reversal of the same macro factors that had pushed it below the three-digit mark in the first place, as well as a return of geopolitical elements providing some undertow this week.
Among the macro indicators that brought positive momentum this week were a fall in jobless claims in the US and positive GDP ratings from UK and South Korea.
Along with these factors, ECB rate cut expectations have also provided support to sentiment (economists at Barclays expect the main refinancing rate to be cut by 25bp).
Fundamentals, on the other hand, have remained largely unchanged since last week. In that, oil market balances are still adjusting to lower prompt demand from the current refinery maintenance season, while supply availability has improved.
The bank doesn't, however, expect prices to stage any significant recovery in the very short term, though some support may be seen as consumers who have recently failed to hedge at lower levels come to the market.
Elsewhere, on differentials, the front-month WTI-Brent spread has maintained its tightening trend and is now hovering around $10/bbl, the lowest level since January last year. This sustained improvement has come in part from market perception that US crudes are becoming more mobile despite Seaway flows still being suboptimal.
A variety of factors have contributed to improve the market’s view of the WTI benchmark, although inventories at Cushing are still in surplus (above the 50 mb mark):
--The surge in crude moved by rail has grown in volume and in prominence, incentivised by the previously attractive differentials. Volumes have climbed from 11 thousand b/d to over 350 thousand b/d today.
--According to Barclays view, the current pace of narrowing of the differential is likely to fade as the markets start brushing with the economics for truck and rail, which are crucial in moving crude from Cushing to the Gulf Coast at least until the major pipelines come into action later this year.
--The southern leg of the Keystone XL line is likely to join the Seaway project in moving crude from Cushing to PADD3 towards the end of the year. Capacity will initially ramp up to 700 thousand b/d and ultimately reach 830 thousand b/d. Pipeline tariffs for moving crude from Cushing to the Gulf Coast (20-year commitment) is currently around $2.5/bbl for light oil, whereas for heavy oil it is around $4.25/bbl.
--The twin Seaway pipeline (450 thousand b/d) is likely to begin carrying crude early in 2014, helping to alleviate the glut at Cushing. Once the original pipeline expansion is fully complete and the twin artery starts carrying oil, 850 thousand b/d will be available to Gulf Coast refiners.
Source: Barclays