The Crude Oil Futures

Source: OPEC 1/3/2012, Location: Europe

The crude oil futures markets were up significantly in November, principally the WTI front-month which registered its highest m-o-m gain since March. Continuing on from its previous month gains, WTI front-month prices showed an impressive performance in November, despite relatively sloppy market fundamentals, the effects of the European debt crisis and global manufacturing falling deeper into recession territory.

Supportive US economic data coupled with the announcement of the reversal of the Seaway pipeline, potentially as soon as the second quarter of next year. Enbridge’s $1.15 billion deal with Conoco Phillips opened the doors to reversing the flow of oil through the Seaway pipeline and thus ease the infrastructure problem causing the Cushing bottleneck. Moreover, geopolitical risk premiums, due to ongoing tensions in the MENA region remain high and continue to support prices. On the other hand, ICE Brent prices increased slightly over the month as the European debt crisis and the return of regional supply of crudes continued to weigh on the Brent market.

On the Nymex, the WTI front-month improved sharply by $10.73/b to average 97.16/b in November, whereas ICE Brent increased by $1.70/b to average $110.49/b and above the key $110/b level. Compared to November last year, WTI was up by 15.2%, while ICE Brent was higher by a hefty 28.2%. The WTI front-month traded as low as $92.20/b in the earlier trading sessions of November before rallying to stand at above $100/b in the middle of the month. WTI was then boosted up to $102.60/b, the highest close in more than five months, on news of plans to reverse the Seaway crude oil pipeline next year, a move expected to help relieve an oil glut at the Cushing, Oklahoma hub. Thereafter, encouraging US economic data, coupled with geopolitical tensions supported the rally in WTI frontmonth prices.

Meanwhile, ICE Brent steadily increased from $106/b to $115/b in the first decade of November, but ended the month at around $108/b, primarily on worsening economic sentiment. At the end of the month, bearish sentiment on the ICE Brent market escalated as worries over Euro-zone debt levels weighed heavily on the market, in addition to the unexpected steady supply return of Libyan production. These concerns prompted investors to cut exposure to riskier assets, such as equities and commodities, like oil, and helped push the US dollar higher, which also impacted the market.

Crude oil futures prices kept their momentum in the first week of December when Nymex WTI settled above $101/b and ICE Brent moved up above 110.00/b. On 12 December, ICE Brent stood at $107.26/b and Nymex WTI at $97.77/b. Data from the US Commodity Futures Trading Commission (CFTC) showed that speculators raised their net long positions in US crude oil futures and options positions in the month of November.

Hedge funds and other large investors increased their net long positions on the New York Mercantile Exchange (Nymex) by 25,797 contracts to 179,850, an increase of almost 17%, a month after static movement. The data showed, however, that much of the rise was down to short-covering, as opposed to the establishment of outright new long positions. Outright longs were up by just 4,175, while shorts were cut by 21,622, suggesting that as prices rose back towards $100/b, bullish traders were not backing the move. During this period, US crude oil prices rose from $98.01/b to $99.79/b. Prices continued to edge higher into early December, settling above $100/b. Moreover, the open Interest volume for the month of November dropped sharply by 85,992 contracts to 1.33 million contracts. This further explains that speculators were not supporting high prices as shown earlier by the small increase in new long positions.

The daily average traded volume during November for WTI Nymex contracts decreased by 82,424 lots to average 636,559 contracts or almost 640 mb/d (almost seven times the physical supply). For ICE Brent, the volume dropped by 9% to 555,479 contracts, while open interest increased marginally by 1% to 943,555 lots, signifying the continuation of strong bearish sentiment among investors in the paper market, triggered by the European debt crisis and the return of Libyan crude to the market.

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