24 December 2010, 18:11  Crude is hyper bullish

We start with Commodities today and they are strong regardless of the fact that U.S Dollar has been a lot stronger in last week but first and foremost, Crude WTI which we went all out bullish off 2 days back as we wrote “WTI is now trading at a discount of $3.51 to Brent and as Brent is making new highs then WTI must follow too and we mince our words at that”. As we write Crude WTI is now trading at $91.40 and Brent is still maintaining a healthy distance of nearly $3 even after WTI has pushed upward rather sharply. So, what was the catalyst yesterday that pushed crude WTI higher, finally snapping out of the $2 per barrel band it was stuck in? Many are of the view that it was drop in the DOE inventories but we hate to differ for one reason and one reason alone; had DOE inventories would have played the role then Crude would have snapped out from the band last [Wednesday] when the drop was even greater than yesterday’s reported numbers and thus we wrote last week “if you don’t rise on a bullish news, you’re not bullish to begin with”. One might try to give some credit to the weather but that too also checks out at almost similar conditions since last week. So why now Crude breaks the band when absolutely nothing has changed? If the previous two aren’t enough than we also have the contango which was narrowing last week and it is narrowing even now, Brent and Crude went into backwardation then and today it is Brent which is still in backwardation but not WTI. So, what really happened? To us the best plausible explanation is the spread between Brent and WTI. We have paid more heed to the spread since August of this year than to the contango but now both seem to be screaming out loud a material change in demand and supply. As we said earlier, prices seem destined to higher levels and we need not say much thus we mince our words at that.

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