January 2013 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose faster in January, advancing by $6.44 (+7.3 percent) to $94.69 per barrel. That rise was concurrent with a slight weakening of the dollar, but occurred despite the lagged impacts of a drop in consumption of 118,000 barrels per day (BPD) -- to 18.6 million BPD -- during November, and a uptick in already-plentiful crude stocks.

The price spread between Brent crude (the predominant grade used in Europe) and WTI shrank in December (January Brent data was not yet available when this was written), to $21.24 per barrel. Brent and WTI prices had been essentially identical until the end of 2010. 

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Many analysts expected the above-normal crude stocks to drive near-term prices (including those of gasoline and diesel) lower, but that has not happened. Geopolitical tensions (e.g., the takeover of and hostage-taking at an Algerian natural gas plant by Islamist militants, and Israeli air strikes of military targets in Syria) have kept oil prices elevated; consumer confidence has suffered as a result.

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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 lower 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.