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Stock Report: United States Brent Oil Fund (BNO) - HE II BNO table 3 3 14


Brief background: Brent Oil is a major trading classification of crude oil and is a benchmark for oil traders globally.  Brent is sourced from the North Sea, where it was originally produced in a Shell oilfield named after the Brent Goose (at one time Shell Oil had a policy of naming all of its fields after birds).  Brent is classified as sweet crude and contains approximately 0.37% sulphur, but is not as sweet at West Texas Intermediate (WTI).

Historically, Brent has traded at plus or minus $3 versus WTI.  Since 2010, that spread has expanded dramatically and Brent has traded at more than a $10 premium to WTI.  This widening of the spread between Brent and WTI is attributed to an increase in oil production in North America which has led to a surplus of oil in Cushing, Oklahoma.

Our long thesis for Brent is based on three key factors: expected decline of the U.S. dollar, tightening global oil supply and demand, and a break out in our quant models.

In the past decade, the U.S. dollar has had a consistently negative correlation to those global commodities that are priced in U.S. dollars.  Intuitively, this makes sense because as the dollar, or any currency for that matter, is devalued it can buy less of any fixed price physical asset, such as a commodity, that is priced in that currency.

Our interpretation of Chairperson Yellen’s most recent monetary policy comments last week is that the Federal Reserve is likely to continue to debauch the dollar and generate commodity inflation.

Specifically while speaking to the Senate on Thursday, Yellen outlined that the Fed will continue with accommodative policy and in fact halt tapering, making it incrementally dovish, if conditions warrant.  On Friday, real GDP for Q4 2013 was revised lower by 80 basis points to 2.4%, which only strengthens Yellen’s dovish case.

On the supply front, the IEA recently indicated that global supplies slid by 290,000 barrels in January. In as much as oil is highly inversely correlated to the U.S. dollar, its price is also driven by supply and demand. Domestically, as stated above, oil production has been accelerating, but the story is very different globally. 

On the demand side, primarily due to accelerating economic growth in Europe, the International Energy Administration (IEA) recently raised its global daily demand expectations by 125,000 barrels a day. 

As a result of this accelerating demand and declining supply, commercial stocks in OECD countries are at a six year low and saw their steepest quarterly decline in Q4 2013 since 1999.  Clearly, the global market for oil is tight and likely to get tighter through 2014 as OECD economic growth maintains its trajectory.

We added Brent Crude Oil (Brent) via the etf BNO to Investing Ideas on February 27th.  


INTERMEDIATE TERM (TREND) (the next 3 months or more)

As a result of the dynamics outlined above, Brent Oil broke out above our TREND (three months or more) line of $108.02.  Currently, on the same duration, the correlation between the U.S. dollar and Brent is -0.75, so highly inversely correlated.

LONG-TERM (TAIL) (the next 3 years or less)

In our analysis, a tight supply and demand story combined with a dovish Fed make future prices gains in Brent likely. As a result of this accelerating demand and declining supply, commercial stocks in OECD countries are at a six year low and the global market for oil is likely to get tighter through 2014.


Stock Report: United States Brent Oil Fund (BNO) - HE II BNO chart 3 3 14