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Crude Oil Price Movements - December 2016

Source: OPEC_RP161203 12/14/2016, Location: Europe

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November was a volatile month for crude, with the OPEC Reference Basket (ORB) wiping out gains from the previous month to plunge nearly 10% to $43.22/b. Oil prices trended down sharply amid uncertainty surrounding the implementation of OPEC’s Algiers Accord agreed upon in late September. A substantial increase in global oil supplies into a market already awash in crude also contributed to the decline in prices. Year-to-date, the ORB value was lower by 21.9% at $39.80/b.

After rising to 12-month-highs in October in reaction to the OPEC decision in Algiers, crude oil futures plunged in November. A sharp increase in global oil supplies was also a contributing factor. An all-time high build of 14.4 mb in US crude stocks, as well as the unexpected result of the US presidential election and the strength of the US dollar, all weighed heavily on oil prices during the month. Nevertheless, the oil complex still managed to soar more than 10%, with futures for both benchmark crudes well above $50/b late in the month following OPEC’s announcement on 30 November of a supply adjustment agreement. ICE Brent ended $4.31 lower at $47.08/b for the month and 19.5% lower at $44.26/b for the year. Similarly, NYMEX WTI dropped $4.18 to $45.76/b in November and 14.3% to $42.68/b year-to-date.

The ICE Brent/NYMEX WTI (or transatlantic) spread narrowed further to $1.30/b, encouraging the US to import Brent-related grades such as West African crudes. Pressure on Brent relative to WTI has come from increasing production and exports of regional light sweet crudes as well as North Sea grades.

Speculators bet strongly on price declines in November. Futures and options trading data indicated that money managers had boosted short positions by record amounts throughout the month.

OPEC Reference Basket
In a very volatile month for crude oil, the ORB wiped out almost all its previous month’s gains to end November close to 10% lower. Oil prices trended down sharply a few days after having reached a 15-month high in response to the OPEC decision in Algiers (the Algiers Accord) at the end of September, which was designed to bring forward market rebalancing. During the two weeks following the agreement, uncertainty regarding its implementation set off a sharp decline in oil prices. A substantial increase in global oil supplies, in a market already awash in oil, also contributed to this price drop. Oversupply in oil came from an all-time high level of output by most major crude oil producers, as well as the return of lost production from turbulent areas and from planned oil field maintenance. The surprise result of the US presidential election, and the increase in the US dollar that accompanied it, also contributed to the deterioration in oil prices seen in November.

Nevertheless, by the end of the month, the highly-anticipated announcement of a supply adjustment by OPEC of around 1.2 mb/d for the first time since 2008 – with scope for cooperation from non-OPEC – sent the oil market soaring by more than 18%, lifting the ORB value to its highest this year. On 2 December, the ORB value reached nearly $50/b for the first time since October last year.

On a monthly basis, the ORB plunged by $4.65 to average $43.22/b in November, down 9.7%. Compared to the previous year, the ORB was also lower by $11.17, or 21.9%, to average $39.80/b y-t-d.

All ORB component values deteriorated over the month, along with relevant crude oil benchmarks. The related benchmarks – namely Dated Brent, WTI and Dubai – decreased in November by $4.61, $4.22 and $4.96, respectively.

The multiple-region-destination grades – Arab light, Basrah light, Iran Heavy and Kuwait Export – decreased $4.89 on average, or a hefty 10.3%, for the month to $42.46/b. The Middle Eastern spot components – Murban and Qatar Marine – saw their value deteriorate by $3.91, or 7.9%, to $45.75/b. The Latin American components of the ORB – Venezuelan Merey and Ecuador’s Oriente – were down by $2.99, or 7.1%, and $4.29, or 9.3%, respectively, to average $39.37/b and $41.69/b. The value of the light sweet ORB components from West and North Africa – Saharan Blend, Es Sider, Girassol, Bonny Light and Gabon’s Rabi – lost $4.81, or 9.7%, to $44.57/b. Indonesian Minas was also down 9.9%, or $4.48, for the month at $40.72/b.

On 13 December, the ORB stood at $52.39/b, $9.17 higher than its November average.

The oil futures market
Crude oil futures were volatile over much of November, driven mainly by questions regarding the implementation of the OPEC adjustment agreement. The sharp increase in oil supplies by OPEC and non-OPEC also contributed to uncertainty, as they revived concerns that the persistent oversupply seen throughout 2016 would carry on into 2017. EIA data showing a 14.4 mb increase in US crude stocks in the final week of October, the largest weekly build on record, came as a major surprise, pushing prices down further. Oil futures were also pressured by the surprise outcome of the US presidential election earlier in the month. The continued strengthening of the US dollar also kept crude oil prices under pressure.

The oil complex soared more than 10% at the end of the month, with futures for both Brent and WTI above $50/b. ICE Brent traded above $54/b, as prices continued to surge following OPEC’s agreed production adjustment announced on 30 November.

ICE Brent ended November lower by $4.31, or 8.4%, to average $47.08/b for the month, while NYMEX WTI dropped $4.18, or 8.4%, to average $45.76/b. Compared to the same period last year, ICE Brent was $10.71, or 19.5%, lower at $44.26/b y-t-d, while NYMEX WTI declined by $7.13, or 14.3%, to $42.68/b.

Crude oil futures prices improved in the second week of December, with ICE Brent standing at $55.72/b and NYMEX WTI at $52.98/b on 13 December.

Speculators showed a more bearish mood as money managers boosted short positions on crude futures contracts throughout the month. The number of short positions for WTI almost tripled over the month from 56,563 lots at the end of October to 163,232 contracts at the end of November, representing an increase of 106,669 lots. Short positions in ICE Brent crude also surged by 86,566 contracts to reach 147,427 lots, which means that shorts have increased by about 142% on the Brent side in a period of just four weeks. This has translated into a significant month-to-month decline in net long positions in both exchanges.

Money managers’ net length in NYMEX WTI crude dropped 79,865 contracts, or a hefty 30%, to 188,324 contracts in the period from the end of October to end November just ahead of the OPEC meeting on 30 November. In ICE Brent futures and options, speculators also decreased net long positions by 83,946 contracts or 22% to 292,764 lots. The total futures and options open interest volume in the two exchanges was also lower by 2%, or 114,346 lots, to 5.43 million contracts.

During November, the average daily traded volume for NYMEX WTI contracts surged 18.9%, or 207,391 lots, to 1,303,552 contracts, while that of ICE Brent was 167,914 contracts higher, an increase of 21.9%, to 932,987 lots. The aggregate daily traded volume for both crude oil futures markets swelled 375,305 lots to 2.24 million futures contracts, representing slightly more than 2.2 billion b/d of crude oil. The total traded volume in both exchanges was significantly higher in November at 27.4 million lots for NYMEX WTI and 20.5 million contracts for ICE Brent.

The futures market structure
Amid increasing oversupply, the market structure of Dubai flipped back to contango, while the contango in both Brent and WTI steepened. The light backwardation seen in the Dubai market structure in October flipped back into a deep contango on an average monthly basis, amid plentiful Mideast Gulf crude supplies and a lack of buying interest. The Dubai M1/M3 premium of 2cent/b flipped into a discount of 94cent/b.

North Sea Brent came under pressure again as the amount of North Sea crude in floating storage rose further. Rising supply of Brent, Forties, Oseberg and Ekofisk also pressured North Sea crudes. This resulted in a further widening of the Brent contango where the M1/M3 discount moved out to almost $2.05/b on average in November from $1.50/b in October.

In the US, the WTI contango worsened over the month amid a significant surprise build in US stocks as well as lower refinery crude intake. The WTI contango (M1/M3) widened 54cent to $1.58/b.

The ICE Brent/NYMEX WTI (or transatlantic) spread narrowed once more in November. This continued to encourage crude imports of West African (WAF) crudes and other Brent-related grades to the US. Pressure on Brent relative to WTI has come from increasing production and exports of rival grades. The amount of unsold North Sea crude in floating storage also rose further. This narrow spread boosted US demand for WAF crudes. US imports of Angolan and Nigerian crude increased to 307,000 b/d and 303,000 b/d, respectively, by mid-November. The first-month ICE Brent/NYMEX WTI spread narrowed to $1.31/b in November from $1.45/b the month before.

The light sweet/medium sour crude spread
The sweet/sour differentials narrowed in Europe and in the US Gulf Coast (USGC), but widened in Asia.

In Europe, Urals medium sour crude continued to see a reduction in its discount to light sweet North Sea Brent in November on tight supply of the Russian grade. The Dated Brent-Med Urals spread narrowed to $1.30/b in November from $1.50/b in October. Sour crude supply in the Mediterranean market has been relatively tight, driving up the price of Russia’s medium sour Urals grade. On the other hand, North Sea Brent was pressured by increasing supply of regional and local light sweet crudes and a growing amount of floating storage in the North Sea.

In Asia, the ongoing narrowing trend seen in the Tapis/Dubai spread reversed course this month amid oversupply pressure from the Mideast Gulf benchmark, Dubai. Meanwhile, Asian Pacific light crudes found support from healthy regional gasoline and naphtha margins. Easing arbitrage flow of Bent-related light sweet crudes due to a wider Brent-Dubai spread in November supported an increase of the Tapis premium over Dubai. The Tapis/Dubai spread widened by 35cent on an average monthly basis to $3.30/b. The Dated Brent/Dubai spread also widened 35cent from its narrowest margin this year of around 80cent to $1.15/b.

In the USGC, the Light Louisiana Sweet (LLS) premium over medium sour Mars was slightly lower in November at $4.50/b, down some 5cent. An increase of imported sour crudes weighed the value of medium sour grades on the USGC. However, light sweet grades were pressured by incoming Brent-related arbitrage crudes amid a narrower Brent-WTI spread.

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