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TheStreet Open House

Oil Prices Spike as Glut Concerns Ease

Stocks in this article: EOGTPLMCVXCHKSUGKMIDVN


NEW YORK ( TheStreet) -- The U.S. benchmark West Texas Intermediate oil price was strengthening Tuesday as fresh supply reports challenged the notion of an insurmountable glut of the product.

WTI light sweet crude oil for December delivery was gaining throughout the day, up $1.85 to $88.47, and the December Brent crude oil contract was recovering by 80 cents to $110.96 a barrel after falling 60 cents to $109.56.

WTI has been seeing some "pretty supportive" moves considering the negative currents flowing through equities and the foreign exchange markets, says MF Global senior markets strategist Richard Ilczyszyn. "WTI has hung up there, while Brent pulled back," he said.

One reason for WTI's gains has been "the perceived glut of WTI oil waning a bit," the strategist said. Ilczyszyn says satellite imagery is showing that Cushing, Okla. crude inventory fell 2% last week, and Midwest storage facilities have been running at roughly 30 million barrels, compared with the full storage capacity of 48 million barrels.

The below full-capacity storage levels are being attributed to the tail-end period of refinery maintenance, where refineries are switching from summer to winter feed blends, and aren't importing as much of the feed in the process.

Brent, meanwhile, was experiencing pressure due to the fact that there's been no major supply disruptions in the Middle East recently, and with Libya beginning to come fully back online.

Rebels against former Libyan leader Moammar Gadhafi have taken over the last Gadhafi stronghold, and another big shipment of Libyan oil has been exported, according to PFGBest senior analyst Phil Flynn.

"Fears that Europe is unraveling, and the U.S. looking better in comparison" is also fuelling WTI over Brent from the demand perspective, Flynn added.

Ilczyszyn sets his stop-take profit levels in the WTI-Brent spread trade at about $25.30, with expectations of a 10% to 20% return -- $23 has been the typical discount at which WTI has been trading against Brent amid concerns about the U.S. supply glut.

There has been a bout of profit taking on the WTI-Brent spread trade Tuesday as differentials narrowed on the supply reports.

Ilczyszyn has been expecting about a 10% return today.

TEAM Asset Strategy Fund manager James Dailey says it's only a matter of time when a more permanent narrowing of the WTI-Brent spread will take place. "No one knows when the earthquake is going to strike or when the avalanche is actually going to start ... we don't see any signs of it yet." However, "it will be fairly violent when it does occur ... It is finally going to resolve itself with WTI being the beneficiary."

To prepare for the potential "violent" reactive jerk in the differential, Dailey says he's already doing a lot of legwork to position himself in the smaller, mid-cap U.S. exploration and production space, which has greater exposure to WTI than Brent.

"By the time that spread collapses to its new range, and domestic producers benefit, stocks probably will have already moved or will move so violently, particularly in the small to mid cap space, it will be very challenging to have liquidity to get a position on in time," he cautions. Thus, the need for preparation.

Looking at oil prices more generally, Ilczyszyn says that fund managers are now positioning themselves for a flood of cash into riskier assets, such as oil, if the S&P 500 breaks out above 1250. "Money will hit the market," he said. Over the last several months, oil and the equities have been trading in very tight correlation.

Energy stocks were trading mixed. EOG Resources (EOG) was up 0.9% to $82.17; Triangle Petroleum (TPLM) was gaining 3.4% to $4.24; Chevron (CVX) was adding 1.6% to $100.22; Chesapeake Energy (CHK) was tumbling 2.4% to $26.64; Southern Union (SUG) was down 0.3% to $41.02; Kinder Morgan (KMI) was lower by 3.1% to $27.31; and Devon Energy (DVN) was higher by 1.4% to $60.54.

-- Written by Andrea Tse in New York.



>To contact the writer of this article, click here: Andrea Tse.

Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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