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The Futures Market Structure - November 2016

Source: OPEC 12/14/2016, Location: Europe

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Healthy physical Asian demand flattened the Dubai market’s contango structure, while light-sweet eastern Atlantic basin oversupply widened the Bent contango almost twofold. Consecutive weeks of draws narrowed the WTI contango slightly.

The Dubai contango flipped into a slight backwardation on a monthly basis, as the improvement in Asian physical crude oil demand intensified in October. Growing demand was due to improving refining margins, steady Chinese buying interest, as well as stockpiling for winter heating demand, particularly in the northern Asia Pacific region – Japan and Korea. The Dubai M1-M3 discount of 60¢/b flipped into a premium of 2cent/b.

Furthermore, medium and heavy sour grades are in backwardation across key trading centres. Nearly 50% of the declines in non-OPEC supply over the past year have come from medium and heavy grades. Sharply dropping Latin America production has reduced the import of medium sour and heavy crudes into the US, while sharp declines in China’s domestic production – the bulk of which is medium sour – has meant China’s sour crude imports have surged this year.

North Sea Brent came under pressure as the Northwest Europe and Mediterranean markets were oversupplied. Increased output from Russia and Kazakhstan’s massive Kashagan oilfield in the Caspian Sea, as well as returning Nigerian and Libyan output, left the region amply supplied. North Sea production also returned from summer maintenance. At the same time, refineries that process oil were undergoing seasonal work, eroding their demand. A further complication was that freight costs had risen from summer lows, hampering long-haul shipping and preventing traders from selling the European surplus into Asian markets or putting it into floating storage. This resulted in a widening in the Brent contango further where the M1-M3 discount moved out to almost $1.50/b on average in October, from 90cent/b in September.

In the US, the WTI contango eased slightly over the month, supported by a considerable drawdown in US crude inventories at a time when the market expected a build in inventories due seasonal refinery maintenance. The WTI contango (M1-M3) dropped 12 centto $1.04/b.

The ICE Brent-NYMEX WTI spread narrowed further in October, encouraging a surge in US crude imports of West African crudes and other Brent-related grades. EIA data for the last week in October showed a significant increase in US imports – reaching 2 mb/d – considering the relatively tight $1-$2/b Brent-WTI spread. The relative weakness in ICE Brent continued as a result of the return of oversupply in Europe that started in the second half of the previous month, as Libya and Nigeria partially resumed supply of light sweet crudes. The unsold cargoes in northern Europe also added pressure. The return of supply from the Buzzard oilfield from maintenance compounded the North Sea oversupply dilemma. On the other hand, NYMEX WTI continued to be supported by several weeks of crude oil stock draws and pipeline issues in the US. The prompt-month ICE Brent-NYMEX WTI spread narrowed to $1.45/b in October, from $2.01/b the month before.

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