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Crude Oil Price Movements - March 2017

Source: OPEC_RP170303 3/14/2017, Location: Europe

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The OPEC Reference Basket (ORB) ended about 2% up at $53.37/b in February for the third consecutive month, with support garnered from the ongoing positive market sentiment initiated at the end of last year when OPEC and Non-OPEC producers agreed to adjust oil supplies. Y-t-d, the ORB value was significantly higher, by 91%, or $25.23, at $52.87/b.

Oil futures were up m-o-m to their highest levels in more than a year-and-a-half, while trading in a relatively narrow range for two months now. The high level of conformity with the supply adjustment among OPEC and other producers has greatly supported the gains. But stock builds in the US and elsewhere, as well as an increase in the US oil rig count, capped these gains. ICE Brent ended February 55cent, or 1.0%, higher, at $56.00/b, on a monthly average basis, while NYMEX WTI increased 85cent, or 1.6%, to $53.46/b. Y-t-d, ICE Brent was a hefty $22.97, or 70%, higher, at $55.72/b, while NYMEX WTI surged by $21.84, or 70%, to $53.02/b.

The ICE Brent/NYMEX WTI spread narrowed, supporting arbitrage economics to the US. Limited US crude oil export opportunities buoyed the US market, while ample supply pressured Brent. The spread narrowed despite an increase in US shale production and a month-long build in crude inventories, dropping to $2.53/b.

With no sign of an easing of the bullish build-up of net long managed money positions, bets on crude oil prices rising have hit a new record high for the third month in a row, giving additional support to oil prices.

The ongoing conformity by OPEC and Non-OPEC producers with the production adjustment is causing the prolonged contango structure to ease in all markets. Moreover, further down the futures curve, the backwardation remained noticeable as of 2H17 onward.

Sweet/sour differentials narrowed in Asia and the US Gulf Coast (USGC), while in Europe, they bucked the trend by widening despite the start of the supply adjustment agreement in the region, which should greatly affect the sour crude balance.

OPEC Reference Basket
The ORB ended the month of February gaining for the third consecutive month, with support coming from the continued positive market momentum that started at the end of last year when OPEC and Non-OPEC producers decided to address an oil glut that has weighed on the market for more than two years. M-o-m, the ORB closed February at its highest since July 2015, adding almost 2% on top of more than 20% accumulated increases since the start of the current price recovery cycle. Reinforcing this improvement in prices was another month of historically strong conformity with the agreed supply adjustments by OPEC and Non-OPEC producers. Support also came as investor optimism over the effectiveness of the production adjustments encouraged record bets on a sustained rally, although growing US output and stubbornly high stockpiles kept price gains in check and contained prices within a tight range. Prices also received a lift from a weaker US dollar.

M-o-m, the ORB value improved by 97cent to settle at $53.37/b on a monthly average, up 1.9%. On a yearly basis compared to 2016, the year-to-date ORB value was significantly higher, rising by 91%, or $25.23, to reach $52.87/b.

ORB component values improved at varying levels over the month, along with the relevant crude oil benchmarks and the monthly changes in their respective official selling price (OSP) differentials. Dated Brent, WTI and Dubai spot prices increased in January by 48cent/b, 90cent/b and 70cent/b, respectively.

Finding additional support from the uplift in OSP offsets, the multiple region destination grades, Arab light, Basrah light, Iran Heavy and Kuwait Export values increased by $1.24 on average, or 2.4%, for the month to reach $53.08/b. These grades continue to be supported by the healthy sour crude oil market in Asia and Europe. The Middle Eastern spot components, Murban and Qatar Marine, saw their values lifted by only 52cent, or 1%, to reach $55.23/b. As for the Latin American ORB components, Venezuelan Merey increased by 22cent, or 0.5%, to settle at $47.03/b, while Ecuadorís Oriente improved the most among all ORB grades, rising by $1.44, or 3%, to reach $50.08/b. Pressured by plentiful Atlantic Basin supply and despite a wide open arbitrage to Asia, values of the light sweet crudes from West and North African Basket components, Saharan Blend, Es Sider, Girassol, Bonny Light and Gabonís Rabi, gained the least at $54.60/b, up 51cent, or 1%. Physical crude differentials for these grades have come under noticeable pressure as supply has surged, and the increased volumes, which had to be sold in the Asian market at lower prices.

On 13 March, the ORB stood at $49.00/b, $4.37 below the February average.

The oil futures market
Oil futures on both sides of the Atlantic were up m-o-m to their highest levels in more than a year-and-a-half. Oil futures have continued to trade in a relatively narrow range for two months now, with the front month prices of crude benchmarks in a bandwidth of $53.00/b to $57.50/b for ICE Brent, and $50.00/b to $54.00/b for NYMEX WTI. Monthly price ranges have been very narrow, with no monthly price range of more than $5/b since November. Prompt prices have not seen this kind of stability for several years, with the last two years having been shaken by significantly higher levels of volatility. Nevertheless, oil prices tested the upper limit of this range during the month, on the back of evidence of high conformity with the supply adjustment among OPEC and other producers. These gains were capped by several bearish market indicators. Despite the supply adjustment, stocks have continued to rise, not just in the US, but also in Europe. Moreover, the increase in the US oil rig count, which reached its highest level since October 2015 at 756 rigs on the 3 March, created a tough environment for the oil market bulls. Crude curves also remain in contango at the front end, and physical crude differentials have come under marked pressure in many places as West of Suez supply has surged. Nevertheless, prices have undoubtedly been provided a floor by the production accords. The speculative community is heavily stacked to the bullish side, buoyed by OPECís renewed willingness to correct market oversupply and underpinned by early indications of historically high conformity. Position data for crude oil futures and options from both futures exchanges shows that outright prices are retaining speculative support, with net length among money managers having increased further as of the last week of February.

ICE Brent ended February 55cent, or 1.0%, higher, at $56.00/b on a monthly average basis, while NYMEX WTI increased by 85cent, or 1.6%, to reach $53.46/b. Y-t-d, ICE Brent was a hefty $22.97, or 70%, higher, at $55.72/b, while NYMEX WTI surged by $21.84, or 70%, to settle at $53.02/b.

On 13 March, ICE Brent stood at $51.35/b and NYMEX WTI at $48.40/b.

With no sign of an easing of the bullish build-up of net long managed money positions, bets on crude oil prices rising have hit a new record high for the third month in a row, giving additional support to prices. Hedge funds and other institutional investorsí betting on higher oil price increased significantly again in February as indicated by the tradersí commitment data from both the ICE and NYMEX exchanges. On the back of both an increase in long positions and a decrease in short positions, money managersí net lengths in NYMEX WTI crude surged further by 33,710 contracts, or 9%, from its level in the last week of January, to 413,637 contracts in the week to 21 February. Similarly, in ICE Brent futures and options, speculators increased net long positions by 34,742 contracts, or 7.3%, to 507,609 lots. The ratio of long to short positions continued to creep up in both exchanges, nearly reaching a hefty 10:1. The total futures and options open interest volume in the two exchanges decreased by 3%, or about 174,687 contracts, to 5.58 million contracts, with the net length positions share reaching its highest level since July 2014, back when WTI was trading in triple digits.

The daily average traded volume for NYMEX WTI contracts dropped 39,305 lots, or 3.5%, to 1,080,338 contracts, while that of ICE Brent was 4,701 contracts higher, up 0.5%, at 894,442 lots. The daily aggregate traded volume for both crude oil futures markets decreased 34,605 contracts to 1.97 million futures contracts, or nearly 2 billion b/d of crude oil. The total traded volume of NYMEX WTI futures in February was lower at 20.53 million contracts, mainly due to a holiday, while that of ICE Bent futures decreased to 17.89 million contracts.

The futures market structure
The ongoing conformity by OPEC and Non-OPEC producers with their agreed production adjustment are causing the prolonged contango structure to continue to ease in all markets, supporting outright prices. The contango on Brent has narrowed, as tighter supply supports prompt prices relative to forward prices. The Dubai crude structures flipped into backwardation during the last trading session of the month, with prompt prices at a premium to those further forward. But on average for the month, the market remained in contango. In the US, consecutive weeks of inventory builds have contributed to further improvements in the WTI crude structure. Meanwhile, further down the futures curve, backwardation remained noticeable for all crudes as of 2H17 onward, when the market is expected to start balancing or even see the start of a drawdown in oil inventories.

The Dubai contango eased further on a monthly average basis amid strong Asian demand and lesser sour crude supplies. The Dubai M1 30cent/b discount to M3 decreased to 10cent/b. The North Sea Brent contango also narrowed more, where the M1/M3 discount decreased to 63cent/b on average, from 86cent in the previous month. In the US, the WTI contango eased 63cent/b over the month. The WTI contango (M1-M3) narrowed to 87cent/b.

The ICE Brent/NYMEX WTI spread inverted its narrowing trend as limited US crude oil export opportunities buoyed the US market relative to Brent, despite an increase in US production of shale oil and a month long build in crude oil stocks and refined products. In contrast, ample Atlantic Basin supply and subdued refinery demand restrained gains in the Brent market. The first-month ICE Brent/NYMEX WTI $2.90/b spread narrowed to $2.53/b, down 37cent. Theoretically, this support comes from the arbitrage economics to the US of Brent-related crudes such as WAF crudes.

The light sweet/medium sour crude spread
Sweet/sour differentials narrowed in Asia and the USGC, while in Europe, they bucked the trend by widening despite the start of OPEC and Non-OPEC implementation of supply balancing in the region, which should greatly affect the sour crude balance.

In Europe, the Urals medium sour crude discount to light sweet North Sea Brent widened 23cent to $1.40/b in February. Despite mass arbitrage of Russian Urals to Asia, the Urals discount to North Sea Dated Brent came under pressure from plentiful second-half February supplies in NWE, while demand in the region was limited. Windy weather in the Black Sea also kept the port of Novorossiysk out of operation. On the other hand, despite ample supplies, North Sea crudes found support from larger volumes of crude heading out of the region to Asia.

In Asia, the Tapis/Dubai spread narrowed by 23cent on a monthly average basis to $2.80/b. The Dated Brent/Dubai spread narrowed 22cent to 65cent/b, its narrowest in more than 18 months. The chief reason behind both narrow spreads was a combination of strong Asian sour crude demand and lower Middle Eastern supplies on the back of a sizeable OPEC and Non-OPEC production adjustment agreed in December 2016. The Asia Pacific light sweet crudes, such as Tapis, were being pressured again by a narrowing Brent-Dubai spread, which encouraged the arbitrage flow of Bent-related light sweet crudes to the region, particularly West African grades.

In the USGC, the Light Louisiana Sweet (LLS) premium over medium sour Mars narrowed to $3.85/b, its narrowest since June 2015. Sour crudes firmed on the prospect of increased demand for exports amid Mideast Gulf production adjustments and a regional shut-in. Nearly 100 tb/d of GoM production went offline following a Louisiana terminal fire. The high USGC sour crude prices helped draw in alternative Latin American cargoes, which are also going to the Asia Pacific region as reduced Middle East sour crude exports boost interest in alternative cargoes.



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