Brent, WTI Crude Spread Soars to Three-Year High

Last week was a volatile week in the commodity markets. It wasn’t one directional volatility, however, it was two-sided volatility with traders primarily reacting to the geopolitical events in Italy. Those events, most notably, drove the price action in the Euro and consequently the U.S. Dollar. Since most of the commodities are dollar-denominated assets, they were also affected by the two-sided trade in the Euro and dollar.

Commodities were also impacted by concerns over potential trade wars with Canada, Mexico and the European Union after the White House decided to move forward with its tariffs on steel and aluminum exports from those countries and region. Finally, the price action was also influenced by a better-than-expected U.S. Non-Farm Payrolls report, which may have put the Fed back on a path towards as many as three more rate hikes in 2018.

Crude oil dealt with its own set of fundamentals with investors being forced to deal with supply issues, which made Brent crude oil a popular buy, and production issues which drove the selling in West Texas Intermediate crude oil.

Gold

After holding steady most of the week due to a weaker U.S. Dollar, a drop in Treasury yields and geopolitical tensions in Italy, gold prices retreated to finish lower after worries eased over Italy and a stronger than forecast U.S. jobs report raised expectations that the Fed will press ahead with another U.S. interest rate hike this month.

August Comex Gold futures settled the week at $1299.30, down $9.70 or -0.74%.

Crude Oil

Crude oil futures finished lower on Friday, but mixed for the week, with U.S. West Texas Intermediate posting a second consecutive week of declines as American oil output moved closer to matching that of top producer Russia.

July WTI crude oil settled the week at $65.81, down $2.07 or -3.05% and international-benchmark August Brent crude oil closed at $76.79, up $0.32 or +0.42%.

The major story in the markets at this time is the disconnect between WTI and Brent crude oil. The spread differential between the two futures contracts reached a three-year high last week, above $10 a barrel. The premium has doubled in less than a month, as a lack of pipeline capacity in the United States has trapped a lot of output inland.

Last week, the Energy Information Administration reported that U.S. crude production jumped 215,000 barrels per day (bpd) to 10.47 million bpd, a new monthly record. Additionally, sources told Reuters last week that Saudi Arabia, the effective leader of OPEC, and Russia were discussing boosting output by about 1 million bpd to compensate for losses in supply from Venezuela and to address concerns about the impact of U.S. sanctions on Iranian output.