So far in 2013 we have issued 8 short term oil market reports. 5 of them have been bearish and 3 have been bullish. Directionally we have been correct in 5 out of the 8 reports. This is about spot on our long-term average performance which is 35 correct out of 55 published reports (64% correct). Our target is to have a hit ratio above 51% on the direction because the oil market is a flip of the coin market and the average participant should hence be at 50%. We conclude bearish in this 9th short term report of 2013. It is a little bit too early for the new year rally in oil prices that we have often seen and we see a fairly high risk in the short term for players taking profit on the currently very high Brent-WTI spread which is this time mainly caused by an unsustainably large Brent-LLS spread instead of mainly consisting of a large LLS-WTI spread.

Eoin Treacy's view

This has been an eventful month in the energy markets with the prospect of easing tensions with Iran dominating headlines. However, the prospect of increased tensions in Iraq remains a tailwind for Brent oil prices. Meanwhile, the continued revolution in domestic US supply has changed the historical relationship between the world's major oil contracts.

While the Brent-WTI spread historically traded at a discount, it has moved to a significant premium over the last few years with the Arab Spring contributing to a loss of Middle Eastern supply while the USA's production remains on an upward trajectory. The spread returned to parity in July and has since expanded back to almost $20. This represents a region where resistance has been encountered on two separate occasions.

In absolute terms, WTI crude has trended lower since September and has now returned to test the $90 area which represents the progression of incrementally higher reaction lows within the almost three-year range. A sustained move below $90 would be required to question short-term scope for an additional bounce.