OPEC Reference Basket
The OPEC Reference Basket rebounded in July from its three-month-long declining streak to settle near the key $100/b mark at $99.55/b, almost 6% above the previous month’s level. Although the global economic slowdown continued to dominate the scene over the month, the re emergence of geopolitical tensions, production problems in the North Sea and hopes that the world’s major economies would act to ease monetary policy to support their economies were among the main reasons for the overall increase in global crude oil prices. Also, sporadic positive economic data, which was not as bad as predicted from the US and China, was seen as an optimistic sign that pushed prices higher in most equity and commodity markets, including crude oil. Furthermore, increasing money-managed long positions also contributed to the upward momentum in market sentiment. The Basket rose to $99.55/b in July, a significant $5.57 or 5.9% higher than the previous month. Year-to-date, the Basket averaged $110.22/b, compared with last year’s average of $107.41/b for the same period, an increase of $2.81 or 2.6%.
All the Basket’s component values improved by around $6 in July, but were a long way from redeeming the significant drop of the previous month. Saharan Blend, Es Sider, Bonny Light and Girassol – or “Brent-related” crudes – rose by $6.36 to an average of $102.45/b, up by 6.6% for the month. Meanwhile, Middle Eastern grades Murban and Qatar Marine, along with the Latin American Basket components, Ecuador’s Oriente and Venezuelan Merey, increased by around 5% to $100.48/b and $93/b respectively. The remaining Basket components, namely Arab Light, Basrah Light, Kuwait Export and Iran Heavy, rose by over 6% in July to end at $98.91/b, which \ was $5.67 higher than in the previous month.
Brent-related Basket components, light-sweet African crudes and European-bound Middle Eastern sour grades were supported by the production disruptions in the North Sea fields due to the short-lived Norwegian strikes, coupled with the tight medium-sour crude market in the Mediterranean which sent spot crudes to record highs. Furthermore, loading problems with alternative crudes, such as Iraqi Kirkuk, also supported the increase in spot prices for crudes that Middle Eastern export formula prices are benchmarked against, such as Urals. Asian or Dubai/Oman related Basket components rose the least over the month in a well-supplied market, as seen by the narrowing backwardation in the Dubai market structure, implying that the market was less tight than last month. Part of the reason for this was China freeing up available Middle Eastern supply for other buyers, after taking the bulk of the surplus sanctioned crudes on offer. The shutdown of the Motiva expansion also resulted in an additional surplus flow to Asia. In the US Gulf Coast (USGC), Light Louisiana Sweet (LLS) gained some ground on West Texas Intermediate (WTI), but it lagged behind the pace of Brent, based on the much-cited supply effect on LLS from increasing the blending of light, tight oil into the grades pool. The relative improvement in the USGC light sweet crude, LLS, has positively affected the overall prices of the Latin American Basket components. The medium-sour crude, Mars, remained largely unchanged for much of the month, but made some gains over the end of the month, after the Energy Information Administration’s (EIA’s) inventory data was released. At the end of July, the market received confirmation of a prolonged outage at the Motiva refinery. A new 325,000 b/d crude distillation unit at the facility will remain offline until early 2013. It is likely that the volumes of Saudi crude heading for the USGC will go down significantly, as Saudi Aramco is a joint owner of the refinery. On 8 August, the Basket stood at $108.36/b, almost $9 above the July average.
The oil futures market
Crude oil futures prices recovered in July from the significant record low levels reached in June, although most of the fundamental reasons behind the fall are still at play in the market, as economic outlooks continue to worsen, while global stocks remain somewhat high. Economic woes continued to dominate the headlines, led by the International Monetary Fund’s (IMF’s) downgrading of global growth for both 2012 and 2013. Growth has slowed not only in troubled OECD countries, but also in key non-OECD economies, such as China, India and Brazil. The massive stock-builds over the first half of the year are still in play, although they are beginning to decline.
China, in particular, appeared to have ramped up crude-buying for storage. According to official statistics, the country had an implied stock-build of .d in the first half. This build is very much in line with the country’s strategic storage objective, as well as with the high Middle Eastern production seen in the first half. Nevertheless, the resurfacing of geopolitical tensions, production glitches in the North Sea, successive large crude oil inventory-draws and optimism that the world’s major economies would act to ease monetary policy to revive economic growth were the main reasons for the recovery in an already oversold market in July. Positive economic data from the US and China, although limited, was seen as an optimistic sign that pushed prices higher in most asset classes, including crude oil. Additionally, increasing money-managed long positions also reflected the bullish sentiment in the global crude oil futures markets. Intercontinental Exchange (ICE) Brent front-month prices increased in July by $6.80 or over 7% to settle at $102.72/b, back above the significant $100/b mark, after briefly retracting from this level last month.
Similarly, the WTI front-month price rose by 6.7% or $5.53 to average $87.93/b in July. The year to-date average of $112.07/b for the ICE Brent front-month was almost identical to that of the same period last year, namely $111.98/b. On the other hand, WTI’s front-month year-to-date average value was $1.45/b lower than that of last year, at $96.74/b, indicating a 1.5% decline from the same period last year. Crude oil futures prices kept their upward momentum in the first week of August, when New York Mercantile Exchange (Nymex) WTI settled at $93.35/b and ICE Brent moved up to $112.14/b on 8 August. Data from the US Commodity Futures Trading Commission (CFTC) showed that speculators reversed their last-month’s trading patterns and increased net long positions in US crude oil futures and options positions in July to 140,636 lots. Hedge funds and other large investors increased their net long positions on the Nymex by 16,620 contracts, indicating higher hedge funds and money-manager bullish trading activity in July. This represented an increase of 14%, compared with a decrease of 10% last month, when hedge funds and money managers were bearish on the contract. The data also showed that both new outright long and short positions increased at the same rate. Speculator activity in ICE Brent crude oil futures and options was seen as significantly more bullish on the upward momentum, as the 50% month-on-month increase in net long futures and options positions in July signified. The net long futures and options positions contracts for ICE Brent crude oil increased by 25,398 lots to stand at 77,510 contracts at the end of July.
The daily average traded futures volume during July for WTI Nymex front-month futures contracts decreased by a sharp 82,311 lots, to average 517,326 contracts. In addition, open interest fell to 1.4 million lots, on average. For ICE Brent front-month, the volume also decreased by a large 117,453 contracts to 593,272 contracts, while open interest decreased marginally to reach 1.2 million lots. It is worth noting that ICE Brent crude oil futures continued to gain market share over WTI Nymex, with the former volume surpassing the latter for the third consecutive month. In terms of open interest, Nymex WTI was still ahead, but ICE Brent was rapidly closing the gap.
The futures market structure
The Nymex WTI market structure remained in contango in July, where the 1st-versus- 2nd-month spread was around minus 30˘/b, unchanged from the previous months. Although the stock level at Oklahoma had come down from the recent all-time high, the market structure had not moved much, supporting the argument that the 150,000 b/d spearhead link between Cushing and the USGC was not enough to overcome the higher inflow from Canada and US shale production. Meanwhile, ICE Brent steepened its backwardation significantly in July, amid tightness in the prompt market due to North Sea supply glitches, the deferral of Norwegian crudes on the back of the recent strike and upcoming maintenance at the Buzzard field. On average, the spread between the second and the first month of the ICE Brent contract averaged around 65˘/b in July, compared with about 5˘/b in June.The transatlantic (Brent versus WTI) spread widened sharply in July, at a time of growing pressure in the WTI market from rising shale crude production. This contrasted with tightness in the Brent market, due to North Sea supply glitches and seasonal maintenance. On average, the front-month ICE Brent/Nymex WTI spread was, at $14.80/b, wider by $1.30 from June, in favour of Brent.
The sweet/sour crude spread
Light-sweet/heavy-sour spreads were mixed during July. The LLS/Mars and Dubai/Tapis spreads of the US and Asia respectively widened in favour of light-sweet crudes. However, in Europe, the Dated Brent/Urals spread narrowed significantly and flipped into negative. A rebound in naphtha and gasoline cracks, on the back of a healthier petrochemical market, supported wider light sweet/heavy-sour differentials in Asia in July, as represented by the Dubai/Tapis spread. Moreover, the wider Brent/Dubai spread, signifying a strong Brent market, coupled with tighter loading schedules, limited the flow of competing West African light sweet crudes to Asia, which also supported a sustained wider Tapis/Dubai spread. On top of this, a higher fuel oil arbitrage to Asia buoyed a wider spread in favour of light sweet Tapis. Over the month, the spread widened by almost $2, to firm up, at the end of the month, at around $6.50/b.
As a result of the full implementation of the European Union (EU) embargo on Iranian crudes imports in July, the Dated Brent/Urals spread in the Mediterranean went into negative territory, with the medium-sour crude, Urals, now trading at a premium to light-sweet Brent. The region was under pressure to secure alternative medium-sour crudes, and refiners were willing to pay a high premium for suitable alternatives. Moreover, the fact that the coming into effect of the EU ban on Iranian barrels coincided with the period of the seasonally strongest demand for crude from the Middle Eastern producer enhanced its impact on differentials in the region. In recent years, European buyers imported the highest annual amount of Iranian crude in July.
The Urals crude differentials to Dated Brent in July averaged around –5˘/b, compared with +$1.40/b in the previous month. In the US, the LLS/Mars spread widened briefly by more than $4 to $8/b between the end of June and late-July, but then came under pressure, ending the month at around $5/b. The wavy ride was reflected in the product markets, as gasoline and naphtha both posted a strong recovery in mid-July, only to subsequently weaken at the end of the month. The shutdown of Motiva’s new 325,000 b/d crude unit played a role in weakening differentials for heavier grades.