Brent Crude Oil’s Bullish Developments, Approaching Important Level

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February 22, 2021 10:00am NYSE:USO

NYSE:USO | News, Ratings, and Charts
  • Brent’s premium remains steady at above the $3 level

  • Brent’s next test is at January 2020 high

  • Brent is OPEC’s price

  • Iran could cause supply problems

  • The BNO ETF tracks the world’s leading benchmark

Brent crude oil is the petroleum that comes from the North Sea, a shallow, northeastern arm of the Atlantic Ocean, between the British Isles and the mainland of northwestern Europe. Brent is a benchmark in the oil futures market. The futures trade on the Intercontinental exchange. Petroleum from Europe, Africa, and the Middle East use the Brent benchmark for pricing.

Brent is a light crude oil, but not as light as WTI or West Texas Intermedia, the crude oil traded on the CME’s NYMEX division. Brent contains around 0.37% of Sulphur, a higher level than WTI. While WTI (USO) is preferable for refining into gasoline, Brent is more suitable for distillates, such as heating oil, jet, and diesel fuels.

Approximately two-thirds of the world’s petroleum output employs the Brent price as a benchmark. WTI accounts for the other third.

Since Brent is the pricing mechanism for Middle Eastern oil, it is sensitive to political events in the turbulent region. Therefore, the Brent versus WTI spread also reflects political risk for the energy commodity when it comes to production, refining, and logistical factors in the Middle East, the home to over half the world’s crude oil reserves.

The United States Brent Crude Oil Fund (BNO) tracks the price of Brent crude oil futures.

Brent’s premium remains steady at above the $3 level

Over past decades, WTI typically traded at a premium to Brent crude oil. Gasoline is the most popular fuel; WTI’s composition makes it the crude oil of choice for refining into the product that powers vehicles. Meanwhile, OPEC and Russia had a dominant role in supplying the world. As production from the Middle East and Russia rose, it depressed the price of Brent compared to the WTI, North American crude oil.

Source: CQG

The chart shows that Brent mostly traded a discount to WTI before 2010. In 2010, the Arab Spring changed everything as political shifts in North Africa and the Middle East caused supply concerns, sending oil higher and Brent to a significant premium above WTI of over $27.50 per barrel in 2011. Meanwhile, over the next decade, the US moved towards energy independence and became the world’s leading oil-producing nation.

In March 2020, daily output reached a record 13.1 million barrels per day, exceeding Saudi Arabia’s and Russia’s daily production. The shift in production dynamics caused Brent to trade at a consistent premium to the US WTI crude oil over the past decade. Meanwhile, a rising Brent premium has been a mostly bullish sign for petroleum’s price over the past decade. The Brent premium was at the $3.67 level at the end of last week.

Brent’s next test is at the January 2020 high

In late October and early November, the Brent premium shrunk to below $2 per barrel as NYMEX crude oil fell towards the November 2 low of $33.64 per barrel.

Source: CQG

As the chart illustrates, in 2021, as crude oil moved higher, the Brent premium over WTI has traded in a range between $2.57 and $3.77 per barrel. At over the $3.30 level at the end of last week, Brent’s premium is trending higher with the price of crude oil and is moving towards the early January 2021 peak.

When it comes to Brent crude oil, the outright price continues to move higher and towards a challenge of its next critical resistance level.

Source: Barchart

The chart shows that after falling to the lowest price this century at $16 per barrel in March 2020, Brent futures made a higher low at $35.73 on November 2. On February 19, Brent was trading just below the $63 level, as it surpassed its first level of technical resistance at the February 20, 2020 high of $60.02. The next upside target stands at the 2020 peak of $71.99 per barrel.

The rising Brent premium over WTI tends to be a bullish sign for the oil market.

Brent is OPEC’s price

When the international oil cartel analyzes the petroleum market, they use the Brent benchmark. Two-thirds of the world’s producers and consumers price output and requirements using the Brent price.

OPEC’s mission is:

“In accordance with its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”

Source: https://www.opec.org/opec_web/en/about_us/23.htm

The cartel’s members work together to construct production policies that maximize their revenues. Over the past years, Russia has become an influential non-member. OPEC+ does not make a move without consultation with Moscow.

The bottom line on OPEC is the cartel’s only interest is the highest petroleum price possible that balances the market’s fundamental equation.

As US energy policy shifts towards a greener path, the pricing power will move back into the cartel’s hands. In March 2020, US output rose to a record 13.1 million barrels per day, more than Saudi Arabian or Russian daily production. A move away from US hydrocarbons in the US increases the cartel’s powers in the global energy arena. According to the EIA, as of February 12, US output stood at 10.8 mbpd. We are likely to see US production continue to decline.

Iran could cause supply problems

The crude oil price is rallying because of several factors. Central bank liquidity and government stimulus are weighing on money’s purchasing power. The US dollar, the world’s reserve currency and pricing mechanism for petroleum, has been falling since March 2020. Inflationary pressures are mounting at a time when optimism over the end of the global pandemic is rising. The prospect for lower US output is pushing the oil price higher.

Meanwhile, Iran remains a clear and present danger in the Middle East. The Saudis and Iranians are mortal enemies in the region. While Russia stands between the two, the potential for rising hostilities remains high. Any outbreaks that impact production, refining, or logistics in the area could cause a sudden upside price spike in the oil futures market. Crude oil will become a lot more sensitive to supply concerns as US output drops. Events in the Middle East are most likely to affect the Brent futures market.

The BNO ETF tracks the world’s leading benchmark

The United States Brent Crude Oil Fund (BNO) tracks Brent’s price. BNO’s top holding and fund summary include:

Source: Yahoo Finance

BNO has net assets of $348.27 million, trades an average of 727,855 shares each day, and charges a 0.90% expense ratio. Since November 2, 2020, the continuous Brent futures contract rose from $35.73 to its most recent high of $65.49 or 83.3%.

Source: Barchart

Since late October 2020, BNO rose from $9.34 to $16.08 per share or 72.2%. The expense ratio and cost of rolling futures contracts cause BNO to underperform the price of Brent futures. However, the product is a proxy for those who do not venture into the futures arena.

The trend in crude oil is higher. The rising Brent premium over WTI is a sign that the rally is not over.

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The United States Oil Fund (USO) was trading at $40.80 per share on Monday morning, up $1.12 (+2.82%). Year-to-date, USO has gained 23.60%, versus a 3.73% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #70 of 112 ETFs in the Commodity ETFs category.


About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…



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