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Crude Oil Price Movements - May 2017

Source: OPEC_RP170503 5/11/2017, Location: Europe

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The OPEC Reference Basket (ORB) rebounded more than 2% in April to a monthly average of $51.34/b. Most of the uplift occurred earlier in the month on increasing expectations that voluntary OPEC and non-OPEC production adjustments will be extended into the second half of this year. Higher OPEC and non-OPEC conformity adjustments, coupled with limited seasonal stock draws due to higher refinery runs and lower US imports, have further supported prices. Year-to-date (Y-t-d), the ORB value was 61.6% or $19.75 higher at $51.81/b.

Month-on-month (m-o-m), oil futures on both sides of the Atlantic recovered, but their upward potential was still limited by US oil output resurgence. Pressure continue to come from bearish, unbalanced oil market conditions due to increasing US crude oil supplies and lower-than-expected inventory draws. ICE Brent ended $1.28/b higher in April, an increase of 2.4% m-o-m, to stand at $53.82/b, while NYMEX WTI increased by $1.45 or 2.9% m-o-m, to stand at $51.12/b. Y-t-d, ICE Brent is $17.16 or 46.1% higher at $54.40/b, while NYMEX WTI surged $16.08 or 45.2% up to $51.63/b.

The ICE Brent/NYMEX WTI spread narrowed slightly as seasonal US crude oil stock draws and export opportunities underpinned the US benchmark. In the meantime, Brent was undermined by increased supplies in the Atlantic Basin. In April, the spread narrowed to $2.70/b.

Net positions in ICE Brent and NYMEX WTI rose 30% from end of March until the middle of April, but hedge funds cut their combined net long positions , creating one of the largest weekly falls on record to 614 mb in the week to 25 April.

Amid increasing supplies of Atlantic Basin light sweet crudes, the time spreads in both Brent and Dubai showed the widest contango since November. In the US, crude oil inventory draws and export opportunities supported a narrowing of the contango for the second month in a row.

Sweet/sour differentials sustained their narrowing trend in all markets on less, while light sweet crudes formed a glut in the Atlantic Basin.

OPEC Reference Basket
The ORB ended the month slightly more than 2% higher on a monthly average basis, supported by a shortlived oil complex rally earlier in the month on increasing expectations that OPEC and non-OPEC voluntary production adjustments will be extended into the second half of this year.

On the other hand, raising US oil production kept pressure on the prices for entire month, holding them within a narrow band.

Meanwhile, limited seasonal stock draws due to higher refinery runs and lower US imports, have further supported prices. Brief supply disruptions from Libya, Nigeria and the North Sea also buoyed oil prices during this period.

On the monthly basis, the ORB values rose by $1.02 to settle at $51.34/b in April, up by 2.0% from March. Compared with the previous year, the ORB value was about 61.6% higher, or $19.75, at $51.81/b.

ORB component values improved, along with relevant crude oil benchmarks and monthly changes in their respective official selling price (OSP) differentials. In April, crude oil physical benchmarks, namely Dated Brent, Dubai and WTI spot prices, rose by 99¢, $1.10 and $1.48, respectively.

Despite plentiful Atlantic Basin supply pressure on price differentials for light sweet crudes from West and North Africa, basket components they improved alongside crude Brent benchmark outright prices. Saharan Blend, Es Sider, Girassol, Bonny Light and Gabon Rabi values increased by $1 on average, or 2%, to $52.06/b. Physical crude differentials for these grades have been under pressure for several months as supply surged. Gains in regional crude oil benchmarks uplifted OSP offsets and healthy global sour markets continued to support the value of multiple-region destination grades, such as Arab Light, Basrah Light, Iran Heavy and Kuwait Export. On average, these grades increased in value by 92¢ or 1.8% to $51.08/b, for the month. Middle Eastern spot components Murban and Qatar Marine saw their values improve by $1.43 or 2.8% to $53.36/b. The Latin American ORB components, Venezuelan Merey and Ecuador’s Oriente also edged up to $45.66/b and $48.70/b, gaining $1.52 or 3.4% and $1.87 or 4.0% respectively.

On 10 April, the ORB stood at $47.31/b.

The oil futures market
Oil futures on both sides of the Atlantic recovered, m-o-m, but their upward potential is still limited by a resurgence of shale and other oil output. Pressure continues to come from a bearish unbalance in oil market conditions due to increasing US crude oil supplies and lower-than-expected inventory draws. Prices are continuing to come under pressure from expectations of higher supply and a slower-than-expected market rebalancing. Moreover, this pressure has kept oil prices range bound since the beginning of the year. Nevertheless, oil futures found support from OPEC and non-OPEC members’ high production conformity this month, amid expectations that the output adjustment could be extended beyond the middle of the year. Further reports of a potential drop in some OPEC and non-OPEC crude exports over May, temporary production turbulence mainly in Libya, Nigeria and the North Sea, and geopolitical tensions in the Middle East and Asia Pacific provided support. Bullish managed money activity earlier in the month facilitated the lift in oil prices. This was demonstrated by an increase in net long managed money positions during this period.

ICE Brent ended $1.28 higher in April, an increase of 2.4%, to stand at $53.82/b on a monthly average basis. NYMEX WTI increased by $1.45 or 2.9% to stand at $51.12/b. Y-t-d, ICE Brent was $17.16 or 46.1% higher at $54.40/b, while NYMEX WTI surged $16.08 or 45.2% higher to $51.63/b.

Crude oil futures prices improved in the second week of May. On 10 May, ICE Brent stood at $50.22/b and NYMEX WTI at $47.33/b.

In the period ending 18 April, managed money activities increased bets on higher oil prices. Managed money net length in oil futures and options in NYMEX WTI surged by 78,750 contracts or 32.2% from the 28 March week level to 323,364 contracts in the week to 18 April. Similarly, in ICE Brent futures and options, managed money raised net long positions by a hefty 99,657 contracts or 30.4% to 358,433 lots. Total futures and options open interest volume in the two exchanges was unchanged at 5.86 million contracts, but the net length positions’ share increased to 86.2% from 79.1%.

In the week to 25 April, hedge funds lost faith in the prospect of an accelerated rebalancing in the oil market. Hence, they cut their combined net long positions in two main futures and options contracts linked to Brent and WTI by 137 mb to 614 mb. The reduction was one of the largest weekly falls on record, and reverses a cumulative increase of 140 mb over the previous three weeks, according to data from regulators and exchanges. Fund managers are now much less bullish about the outlook for crude oil prices than they were back at the beginning of the year. Bullish long positions outnumber bearish short positions by a ratio of 4:1, down from 7:1 at the beginning of the year and a peak of more than 10:1 in late February.

The daily average traded volume for NYMEX WTI contracts decreased 31,434 lots or 2.7% to 1,117,121 contracts, while that of ICE Brent was 29,912 contracts higher, up 3.2% at 963,538 lots. The daily aggregate traded volume for both crude oil futures markets slipped 1,522 contracts to 2.08 million futures contracts, or roughly 2.1 bb/d of crude oil. The total traded volume NYMEX WTI futures in April was significantly lower at 21.23 million contracts, down about 20%. Similarly, ICE Bent futures volumes decreased 14.7% to 18.31 million contracts.

The futures market structure
Amid increasing supplies of Atlantic Basin light sweet crudes, pressure in physical crudes became more obvious in April as time spreads in both Brent and Dubai showed the widest contango since November. This supply glut is simultaneously pressuring both markets due to open arbitrage to Asia on the back of a significant narrowing of the Brent-Dubai spread. Part of the weakness in the Atlantic Basin stems from seasonally low demand because of refinery turnarounds. Some 1.5 mb/d of refining capacity is likely to be offline for maintenance around Europe, the Mediterranean and Russia. Record amounts of North Sea crudes have moved east in April.

The Dubai contango widened to its highest point since November, despite limited sour crude supplies to an Asian enclave due to OPEC voluntary production adjustments. Crude oil sales from storage tanks around Singapore continued to rise and further weighed on demand for prompt crudes, hence worsening prompt prices relative to forward cargoes. Some refiners have also shunned Middle East grades and turned to Brentlinked supplies, as Brent's premium to Dubai narrowed below $1/b. North Asian refiners are expected to complete maintenance by July, which will increase their crude demand, but they have already bought longhaul barrels from Europe and the United States. In the US oil market, somewhat limited crude oil inventory draws and export opportunities supported the narrowing of the contango for the second month in a row. Meanwhile, further down the futures curve, when the oil market is expected to start balancing, backwardation remained noticeable for all crudes, albeit further out in 1Q18 compared with the previous month.

Dubai’s M1/M3 discount increased to 70¢/b from of 25¢/b in the previous month. The North Sea Brent M1/M3 discount increased to 80¢/b on average, from 50¢/b in the previous month. In the US, WTI contango eased 25¢ as WTI’s M1/M3 discount narrowed to 73¢/b.

The ICE Brent/NYMEX WTI spread narrowed slightly as US crude stock draws and export prospects underpinned the US benchmark. In the meantime, its European counterpart Brent was undermined by increased supplies of light sweet crudes in the Atlantic Basin. The first-month ICE Brent/NYMEX WTI $2.86/b spread narrowed to $2.70/b, down 16¢/b. This spread level will continue to support arbitrage economics out of the US, but to a lesser extent compared with 1Q17, particularly to Asia, where several US cargoes were sold to China and elsewhere.

The light sweet/medium sour crude spread
Sweet/sour differentials sustained their narrowing trend in all markets on the less availability of sour grades, while an increase in US output and a glut in the Atlantic Basin led to an oversupply of light sweet crudes.

In Europe, the light sweet North Sea Brent premium to Urals medium sour crude decreased by 62¢ to $1.04/b, its narrowest since September 2105. Urals crude was supported by healthier demand, less supply to European markets and active arbitrage to Asia, with a record low Brent-Dubai spread and rising interest from Indian refiners. Russian crude exports from Baltic Sea ports in May were set to fall to 6.7 million tonnes from 7.5 million tonnes in April, according to the preliminary loading schedule. On the other hand, in addition to a regional increase in supplies, North Sea Brent crude was under pressure from an influx of US supply, which countered strong export flows. Almost 20 mb of North Sea crude, mostly Forties and Ekofisk, were en route to Asia, likely making May a record month for flows east. Imports have also picked up. Some 13 mb of US crude and condensate, equivalent to around 113 tb/d, have arrived in Northwest Europe (NWE) so far this year, compared with around 8.4 mb, or 73 tb/d, in the same period one year ago.

In Asia, the Tapis premium over Dubai shrank further by 24¢ on a monthly average basis to $2.30/b, under pressure from an ample supply of light sweet crude available to refiners. The Dated Brent/Dubai spread also narrowed 11¢, to 24¢/b, the narrowest point since 1H15. Asia Pacific light sweet crudes, such as Tapis, continued to be pressured by a narrowing Brent-Dubai spread, which encouraged the arbitrage flow of Bent related light sweet crudes to the region, this time from all regions. This month also witnessed arbitrage volume movements from the Americas to Asia. Estimated crude shipments from Europe to Asia hit an alltime high of 55.4 mb in April, with flows in the first four months up 9% from the same period a year ago. The flows will continue, as voluntary production adjustments are expected to be extended for another six months, thus allowing Asian refiners to increase purchases of low-sulphur oil from Europe and Africa. The region was also kept well-supplied from storage releases as the contango market structure has disappeared.

In the USGC, the Light Louisiana Sweet (LLS) premium over medium sour Mars narrowed slightly to $3.45/b, its narrowest in two and a half years. Sour crudes continue to firm on increased demand for export and USGC refinery demand due to less availability of Mideast Gulf sour crudes as they return from seasonal maintenance. High USGC sour crude prices helped draw in alternative Latin American cargoes, which are also going to the Asia Pacific, as reduced Mideast Gulf sour crude exports boosted interest in alternatives.

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