An unexpected shutdown of one of Europe’s largest oil pipelines has pushed several energy contracts to new 2.5 year highs this week and has opened the door on the charts to further upside to end the year. The entire complex is rallying for a 4th straight day, with refined products trading close to a dime above where they stood just a week ago, wiping out the 5% decline we saw to start the month in what has been one of the more memorable head-fakes of the year.
Brent crude is leading the charge higher after the Forties pipeline was forced to shut due for emergency repairs. That pipeline system is the largest in the North Sea, and one of the key arteries for physical delivery of crude oil tied to the Brent contract. The downtime is expected to last for several weeks and will shut in roughly 400,000 barrels/day of production in the area that does not have an alternate delivery route. It’s been a rough couple of days for owner INEOS who just bought the pipeline system from BP 6 weeks ago, and is also reportedly dealing with an unexpected shutdown of a refinery in France due to an explosion.
The rally has blown out the WTI/Brent spread to its widest level in 2.5 years which should provide some margin benefit for US refiners if they can source a WTI based crude as refined products are following Brent higher. This relative strength for Brent may be a short term phenomenon however as the LOOP has confirmed plans in the last week to begin exporting US Crude via the offshore system that can handle the world’s largest tankers.
The short term technical outlook has completely flipped during the rally with indicators flipping from oversold to bullish in just a few short days. If the overnight highs can be taken out this week, there’s a chance we see a move to challenge the 2015 highs over the next several weeks which could mean ULSD north of $2, and WTI in the $60s. If the December action has taught us anything however, it’s that it’s best to wait and believe it when you see it.