In June, as the 2Q12 came to a close, the OPEC Reference Basket continued its quarter-long declining streak for the third consecutive month to settle below $100/b for the first time in a year and a half. The drop in the value of the Basket in June was a significant 13%, the highest month to-month decline since the 22% drop back in December 2008. Beside a gloomy economic picture, particularly in the Euro-zone, the main factors driving down the Basket value were speculators who increasingly sold off long positions and abundant crude oil supplies.
A month-long series of headlines about weak economic data from China and the US indicating that economic worries are not limited to the Euro-zone also shaped bearish market sentiment, prompting investors to massively liquidate positions to limit exposure. Similar to the previous month, accumulated long positions continued to exit the market significantly over the entire month of June in both main futures markets through large-scale sell-offs that have signaled growing weakness in the crude oil markets.
In June, the OPEC Reference Basket fell to an average of $93.98/b, the first time it reached a level below the key $100/b since January 2011. The Basket lost a hefty $14.09/b or 13% compared to the previous month, which is the highest decrease since the $11.16/b decline three and a half years ago. Nevertheless, for the 1H12, the Basket averaged $112.07/b, which was $5.40/b above the same period in 2011. The values of all Basket components diminished significantly in June, with Saharan Blend, Es Sider, Bonny Light and Girassol falling by $15.31 to an average of $96.09/b, down by a hefty 13.75% for the month. Meanwhile, Middle Eastern crudes Murban and Qatar Marine, along with Latin American Basket components like Ecuador’s Oriente and Venezuelan Merey, dropped by around 12% to $95.81/b and $88.37/b, respectively.
The remaining Basket components — namely, Arab Light, Basrah Light, Kuwait Export and Iran Heavy — also lost 13% of their value in June to end at $93.24/b, $14.02 lower compared to the previous month. Asian or Dubai/Oman related Basket components suffered the least deterioration over the month. They were supported by a relatively stronger sour market in the region. The strength in Dubai was seen as its market structure has remained in backwardation despite plenty of factors to the downside. Strong fuel oil cracks coupled with continuing Chinese buying ahead of a significant capacity expansion, as well as stock building due to low outright prices, has supported the sour market.
European Basket components, African crudes and imported Middle Eastern sour crudes were all pressured by the vast deterioration in the outright Brent prices, as well as by the flip in Brent market structure into contango for the first time in almost a year. Sweet crudes were weakened by lower European demand amid lower refinery runs and low naphtha cracks, while sour benchmark Urals was supported by a steep decline in loading schedules, particularly in the Mediterranean. In the USGC, a higher supply of medium sour crudes over the month diluted the value of related imported crudes.
Medium sour crudes have become quickly available from the restart of all offshore Mars platforms and the unexpected shutdown of the newly commissioned and largest US refinery, which largely ran medium and heavy sour crudes. Meanwhile, the relative improvement in USGC light sweet crudes (LLS) has positively affected the overall prices of the Latin American Basket components. Following the start-up of the Seaway link, higher inflows of light sweet barrels from the landlocked Cushing hub were likely behind the earlier LLS’s weakness relative to Brent; however, the link may have recently begun to pump heavier barrels, which has in turn relieved some of the pressure on regional light grades. On 10 July, the OPEC Reference Basket improved to $96.43/b, $2.45 above the June average.