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Why is Oil So Strong in the Face of Almost Universally Weakening Markets?

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Posted on Fri, 14 June 2013 21:02 | 0

The markets have looked a lot shakier in the past two weeks and that certainly applies to more than the bond and equity markets.  As treasury rates have risen and bond prices have fallen, we’ve seen a massive deleveraging from the Japanese stock market that has hit currencies hard as well, particularly the Yen.

Whew – all of that has made a safe haven for investment hard to find and commodities have continued to suffer as well:  Copper is reeling as is iron ore and most of the grains. 

But not oil.  Oil has managed to stay sticky in price with Brent remaining above $100 a barrel and West Texas Intermediate hovering close to $95 a barrel.  How can oil stay so strong in the face of almost universally weakening markets?

The answer lies in two reasons unique to oil – and they are both financial and not fundamental in nature. 

First is the Brent oil market, which has become the global benchmark for pricing.  Brent crude is priced mostly upon North Seas crude, which has continued to experience a weakening supply profile:  the production from the North Sea continues to disintegrate.   And even though new supply from deep water and shale plays in the US augment the already increased supply from Saudi Arabia and Iraq, the financial connection to a small North Sea market with an inherent supply shortage continues to put upwards pressure on prices. 

And while it would be far more…

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