Since 2012, the -10.50 level in the spread has consistently acted as an important pivot point for the spread and is therefore quite instructive in showing continuous shifts in the balance of power in the market (see Weekly continuation chart below). First, note that throughout 2012 the -10.50 level served as important resistance to any rally attempts throughout calendar year on our journey downward to November, 2012 lows at -26.00.
Next the Spring, 2013 challenge and eventual break of this same -10.50 pivot level foreshadowed our eventual Summer reclamation of parity in the spread. By October, 2013 we again retested the -10.50 level and our eventual break of the level lead to a stab at -20.00, only to resolve itself in yet another retest at 2013’s year end.
With so much historical emphasis on the -10.50 level our recent break above the pivot during the week of January 27 suggests an underlying strength in the WTI-Brent Arb with the potential to challenge the old resistance at -5.00 and perhaps even an eventual retest of parity. That stated, as usual the fly in the ointment for the spread is the -10.50 level itself which currently serves as support, but if broken will immediately reverse the tone of this market from bullish to bearish.
Richard Weissman is a Senior Associate with the Energy Management Institute (www.emi.org) and author of Trade Like a Casino: Find Your Edge, Manage Risk and Win Like the House.