Oil Rallies Above $30/Barrel
Today's trading continued the broadly unspectacular but positive gains we've seen over the past couple weeks. The S&P/TSX Composite Index closed up 0.5%, the Dow Jones Industrial Average closed up 0.6%, and the S&P 500 closed up 0.9%.
Source: Bloomberg, May 5th
The big news of the day was oil, which broke some important benchmarks in the Brent crude market and is setting up for an important day tomorrow.
Brent Breaks $30/barrel, US Inventories Out Tomorrow
Once again, there is more than one price of oil, and it's important to distinguish between the two.
Brent crude, the benchmark crude traded in Europe, is a good measure of the market for oil coming from OPEC and for demand for oil in the developed world. So it's a good sign that Brent crude rose over $30/barrel today, entering the territory where oil production is a sustainable business model:
WTI, the benchmark crude used in North America, is probably more important to Canadians and Canadian investors. However, since WTI contracts deliver to a single storage facility in Oklahoma, and since the storage space at that facility is finite, pricing anomalies are very possible, and one emerged last month:
Source: Bloomberg, May 5th
Whether we'll see the same problems this month depends on a few things. Firstly, if demand for oil from refiners has picked up, physical traders will be able to buy barrels once oil ETF's (like USO) start rolling their holdings into July contracts. Secondly, if inventories have declined generally, we won't be banging up against the limit of US storage capacity like we were last month.
That second question makes tomorrow something of an inflection point. US oil inventories are announced tomorrow, and a spectacular number could spur the horde of speculators that have entered the market into a flurry of activity.
The global oil market is obviously of huge importance to Canadian investors. Those with holdings in Canada's energy companies will take heart in the fact that WCS (the Canadian benchmark crude) is creeping up near $20/barrel after trading for less than $5 a few weeks ago. Even those holding nothing more than Canadian dollars, which is strongly geared to the price of oil, will breathe a sigh of relief at more normal prices.
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