As a conservative indicator of the oil industry, the West Texas Intermediate tends to not be too quick to respond to changes. At the moment, however, the WTI has begun one of its most remarkable climbs in recent memory. Futures close to expiration on the WTI are trading at the largest premium ever seen since 2014.
The fact that it’s the WTI indicating such positive sentiment is a big deal. Going by the way it has indexed market forces in the past, it’s a reliable sign of long-term market strength. This is encouraging news to anyone invested in the oil trade. Here’s more about a number of different forces at play.
Inventory Levels Are Dipping
The storage hub at Cushing, Oklahoma, a point of delivery for West Texas Intermediate contracts, is one of the nation’s most important areas of oil trade activity. At this important hub, inventory levels have touched their lowest level in nearly three years. The lower these levels get, the greater the strength lent to oil prices.
Weather Pushes Up Demand
Harsh winters are a reliable indicator of high oil demand – the market tends to turn robust on the back of demand for heating oil and electricity. With harsh winters having touched several regions around the world this year, healthy demand has been global in nature, and has kept inventories low and prices high everywhere.
Effective production cuts by OPEC member states, along with political turmoil in various parts of the world, have contributed too.
Traders Bullish on WTI
Traders in WTI options have expressed confidence in the lasting strength of oil prices. Call options for 10 million barrels recently traded on the belief that backwardation greater than 15 cents a barrel could occur. WTI contracts for delivery in February versus March rose by as much as 16 cents, the highest level of backwardated trading seen in more than two years.
Not only is the market showing spectacular levels of strengthening and support, it’s doing so very quickly. According to Sigma Drilling Technologies, the dampener manufacturer and vendor of pulsation solutions, all of this means one thing to American drillers: they need to invest in their rigs. The more ambitious the operation that they run, the more ready they need to be to respond to market forces.
