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The monthly average
U.S.-dollar price of West Texas Intermediate (WTI) crude oil turned higher in December,
advancing by $1.59 (+1.8 percent) to $88.25 per barrel. That drop was
concurrent with a slight weakening of the dollar, a modest drop-off in crude
stocks, and the lagged impacts of a jump in consumption of 549,000 barrels per
day (BPD) -- to 18.7 million BPD -- during October.
The price spread between Brent crude (the predominant
grade used in Europe) and WTI shrank in November (December Brent data was not
yet available when this was written), to $22.40 per barrel; that differential
was the widest in over a year. Brent and WTI prices had been essentially
identical until the end of 2010.
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While traders pushed futures
prices modestly higher, it is apparent they think the crude oil market is going
through another transition. As a result, near-term contracts are in “contango”
(each subsequent contract is priced higher than its predecessor) while latter
contracts are in “backwardation” (each subsequent contract is priced higher
than its predecessor). Our interpretation of this pattern is that traders
anticipate tight oil markets through mid-year 2013, but loosening supplies
thereafter.
The foregoing comments represent the general economic
views and analysis of Delphi Advisors, and are provided solely for the purpose
of information, instruction and discourse. They do not constitute a
solicitation or recommendation regarding any investment.
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