OPEC Reference Basket
The upward trend of the OPEC Reference Basket — which started in last summer came to an end in May. After nine consecutive monthly gains, the OPEC Reference Basket fell sharply in May to average $109.94/b, down $8.15, or 6.9%, from April. That was the largest percentage drop since the 9.5% decline of May 2010. Compared to a year earlier, the OPEC Reference Basket was $35.46, or 47.6%, higher in May 2011.
The OPEC Reference Basket lost $15.50/b in the first five trading days of May as futures prices tumbled amid speculative sell-offs triggered by bearish expectations for US economic growth following disappointing macroeconomic data. However, continued unrest in the MENA region maintained a risk premium in prices.
All Basket components dropped in May, but remained well above the levels of a year ago. Compared to a year earlier, African grades showed increases ranging from 52.1% to 54.8%. Ecuadorian crude Oriente also rose by more than 52%. African crudes rose sharply in the first five months of the year, supported by a lack of light sweet crudes due to the absence of Libyan crude because of the unrest in the country.
In May, Saharan Blend showed the largest decline of $9.77, or 7.7%, from the previous month. Basrah Light also fell by more than $9, followed by other light crudes. The strong decline in light crudes came as a correction from the high levels of the previous month and increasing supply, while refining throughput remained weak, unable to absorb all available crude within Europe. Ecuadorian Oriente lost almost $8.20, or 7.3%, due to abundant supply, with particularly heavy crudes coming from Colombia.
Venezuelan crude Merey showed the lowest loss of $6 to fall back below $100/b, ending the month at an average of $98.44/b.
The Middle East crude oil market weakened in May on higher supplies and lower demand due to poor refining margins. Heavy to medium sweet grades were the most affected. Qatar Marine slipped into a discount, down from deals in early May at premiums of 40-50¢/b to official selling prices. Light sour Murban also was under pressure. Declining gasoil cracks and narrower Brent-Dubai EFS further contributed to the bearishness of the market. The weakness accelerated at the end of the month on increasing sales of Dubai partials. Dubai partial cargo trades hit a peak of 52 deals on the last trading day of the month.
However, Qatari Tasweeq sold deodorised field condensate for loading in July at the highest premiums since at least 2009 as Asian consumption recovered in the aftermath of Japan's March earthquake and demand from Europe increased. Premiums ranged between $2.90/b and $3.20/b to Dubai quotes compared with June-loading cargoes sold in April at premiums of about $2.70-2.80/b.
The OPEC Reference Basket continued to hover around $100/b in the first trading days of June as uncertainties kept futures prices moving up and down. The Basket stood at $113.43/b on 9 June, resulting in a year-to-date average of $106.55/b compared with $76.31/b for the same period a year ago.
The oil futures market
Crude oil futures prices weakened significantly in May as the market turned bearish despite ongoing absent Libyan crude oil because of unrest. On the Nymex, US benchmark WTI front-month plunged by almost $9.5 on 5 May to settle below $100/b for the first time since mid-March. The drop of $9.5/b was the largest decline in a single day since the onset of the 2008 financial crisis. Prices fell further on the following day, bringing the total loss of the first five trading days of May to $16.75/b, or almost 15%.
The collapse in prices was attributed to a strong speculative sell-off triggered by bearish expectations for the US and global economic growth as well as to the strength of the US dollar. WTI recovered on 9 May but fell again in the following days, particularly on 11 May when it lost 5.6% on the back of an unexpected jump in gasoline inventories and rising concerns about slowing economic growth in China and continuing Euro-zone debt worries. This brought the WTI front-month to around $98.2/b before it dropped to $96.91/b on 17 May, the lowest in 13 weeks.
However, the WTI front-month stabilized to some extent in the following eight trading days, moving within a range of $98-100/b as uncertainties about global economic growth and oil demand remained, before it jumped to a three week-high of $102.70/b on the last trading day, supported by concerns of a supply disruption on the Keystone pipeline carrying Canadian crude to the US. The WTI price was also supported by a weaker US dollar against the euro on the back of news that the European Union will grant Greece a new package to resolve its debt problems.
On a monthly basis, Nymex WTI front-month fell $8.68, or 7.9%, to average $101.36/b. That was the lowest monthly average since the $89.74/b of last February. The drop of May was the first since the $1.12 of September 2010. In early June, the WTI front month continued to hover around $100/b, due to ongoing uncertainties regarding global economic growth and thus on global oil demand.
The relationship between WTI prices and the value of the US dollar strengthened significantly in May and early June. In London, ICE Brent declined sharply also in May but remained above $100/b during the whole month to average $114.42/b, down $8.67, or 7%, from the previous month.
This decline was the first since last July and the largest since the $8.76/b of May 2010. It followed the same trend as WTI and plummeted by almost $10.40 on 5 May to close at $110.8/b. With the exception of 10 May when it ended at $117.63/b, ICE Brent hovered within a $110-115/b range in the remaining trading days of the month.
As it continued to be supported by a lack of Libyan crude, Brent’s premium over WTI widened further to average $13.2/b but remained below the $14.5/b of February when Brent’s premium over WTI hit almost $20/b in the third week of the month. It is worth recalling that a year ago, Brent’s premium stood at $3/b.
The Brent spread to WTI jumped to almost $18/b on 7 June, supported by an increase in the Brent price and the monthly shift in crude oil allocations by index funds. In addition, WTI remained pressured by rising flows of Canadian crude into the Midwest, especially the Cushing, Oklahoma, delivery point for the Nymex WTI futures contract, and a lack of transportation infrastructure to evacuate crude from the Midwest to other regions.
The futures market structure
In May, Nymex WTI and ICE Brent futures curves moved down but kept their previous shapes of April — i.e., Nymex WTI continued to show a marginal contango at the front followed by a flat to backwardation on starting from the ninth month while the ICE Brent curve stayed in a slight backwardation.
The difference in the shapes of Nymex WTI and ICE Brent curves is attributed to the fact that Nymex WTI remained pressured by huge stocks at Cushing and a lack of transportation infrastructure, while ICE Brent remained supported by the absence of Libyan crude from the market.
The spread between the second and the first month of WTI remained stable at around 50¢/b in May. A year ago, the same intermonth spread stood at plus $2.8/b after the front-month tumbled by almost $10.5/b. In contrast, the spread between the tenth and the ninth month showed a marginal backwardation of 4¢/b in May.
In contrast, the spread between the second and the first months for ICE Brent widened to minus 45¢/b. A year ago, it showed a contango of around $1/b. However, the backwardation was lower for forwards, meaning concerns about supply were higher at the front of the curve as disruptions of production in Libya continued to because of the unrest in the country.
The sweet/sour crude spread
The light sweet-heavy sour spread remained strong in May although it edged down from the previous month. The strength in the spread continued to be attributed to a lack of light sweet grades because of the absence of Libyan crude oil production from the market and increasing medium and heavy sour grades.
The dated Brent-Urals differential fell from $4.12/b to $3.6/b in May. However, despite the decline, Brent’s premium over Urals remained the second highest so far this year after the $4.12/b of April. If we exclude April’s level, the spread of May was the highest since June 2008. The strong level of Brent over Urals was attributed to a bullish market for Brent, which firmed significantly in 2011 compared with Urals, which also strengthened, but at a slower pace.
Even the differential between dated Brent and Dubai weakened in May, but stayed very strong compared to historical levels. The dated Brent-Dubai spread fell to $6.34/b, down $1.37 from the previous month, but remained the second highest so far this year and showed an increase of $2.13 from a year ago. In the case of Urals, the Brent-Dubai spread widened significantly in 2011 to average around $5.5/b so far this year compared with less than 40¢/b a year earlier.