The Crude Oil Futures Market

Source: OPEC 9/19/2012, Location: Europe

For the second consecutive month, crude oil futures prices have moved up significantly in August for a record m-o-m gain. The Nymex WTI front-month rallied by 9.6% in August and has soared by almost 25% since mid-June. ICE Brent gained 9.2% in August, the biggest monthly percentage rise since prices jumped by 10.5% in February, adding to a 7% rally in July.

Various factors have been contributing to the rally in crude oil prices during the past two months. Over the month, speculators increased their bets on rising oil prices and have increased net long positions in both crude oil futures markets, taking them to levels seen earlier this year. Hedge funds and large investors were keeping an eye on hurricane activity in the Gulf of Mexico, the possibility of further monetary easing by central banks, and geopolitical factors.

Speculators increased net long positions on the ICE and Nymex by a hefty 78%, taking the total to 294,280 contracts at the end of August from 165,432 lots at the end of June. In August alone, the upsurge in net long positions was 38%, as hedge funds and other money managers have started to ready themselves for another big spike in oil prices over the coming months, as their bullish action suggests. Physical constraints in North Sea crude supply and a contraction of US crude inventories were also among the major causes in the crude oil price escalation. Speculation on the possibility of further monetary easing from major central banks, improving economic sentiment in the US and hurricane activity in the Gulf of Mexico, also contributed to the surge.

Production problems at the Buzzard field, the largest component of the benchmarksetting Forties stream, boosted supply concerns in the European market. Buzzard field production dropped to 50,000 b/d from the typical 200,000 b/d production level. The field will also be shut starting in the first week of September for maintenance, which is scheduled to last until mid-October.

This, in addition to lingering geopolitical tensions, were the most significant fundamental factors affecting the price rally, as seen from the substantial surge in the Brent market compared to WTI, despite ongoing economic woes in Europe. In the US, the world’s biggest crude oil consumer, the Energy Information Administration (EIA) reported 4 consecutive weeks of contractions in US commercial crude inventories on the back of further declines in US crude oil production, due to struggling output of Alaskan North Slope crude oil. This has notably supported the upward momentum in prices, particularly in the first two decades of the month.

ICE Brent front-month prices increased in August by $9.95 or around 10% to settle at $112.68/b, rebounding to above the $110/b level last seen during the month of May. WTI front-month improved by over 7% or $6.23 to average $94.16/b in August, not far from its level three months ago. Compared to the same period last year, the ICE Brent front-month averaged 0.4% higher at $112.15/b, compared to last year’s level of $111.73/b. On the other hand, the WTI front-month year-to-date average was $96.42/b, down by 28¢ or a negligible 0.3% from the previous year. Crude oil futures prices kept their upward momentum in the first week of September, when Nymex WTI settled above $96.54/b and ICE Brent moved to $114.81/b on 10 September.

Data from the US Commodity Futures Trading Commission (CFTC) showed that over the past month, speculators have continued to significantly expand their net longpositions, driving them to the levels seen during the first quarter of this year. Hedge funds and other large investors increased net long positions on the Nymex by a hefty 51,835 contracts, indicating bullish trading in August.

This represents a record increase of 37%, adding to the 14% increase seen last month. Speculator activities in ICE Brent crude oil futures and options were also seen to be more bullish as net longs increased by almost 40%, in addition to last month’s 50% gain. Money managers’ net long futures and options positions on the ICE Brent crude increased by 30,375 lots to stand at 107,855 contracts at the end of August. In total, speculators boosted their combined net long positions in the two main crude oil futures markets, ICE and Nymex, by a hefty 78%, taking the total to 294,280 contracts at the end of August from 165,432 lots at the end of June. The expansion in combined net long positions in August alone was 38%, suggesting that hedge funds and other money managers are betting on another big rally in oil prices in the next few months. Nymex WTI trading volume decreased in August by a further 9,564 lots to average 507,973 contracts.

Meanwhile, open interest increased sharply by 62,588 contracts, supporting the previously noted increase in speculative activity in July and August, to stand at 1.5 million lots. ICE Brent front month volume also decreased for the second month by 43,821 contracts to 553,165 contracts, while open interest fell by 26,362 to reach almost 1.2 million lots. As noted last month, ICE Brent crude oil futures continue to gain market share over WTI Nymex, with the former surpassing 45,000 contracts in August. However, Nymex WTI open interest still lies ahead in terms of volume, while ICE Brent is quickly catching up. The trend supports Brent’s status as the benchmark grade for pricing more than half of the world’s oil. While North Sea output has fallen almost 50% in the past decade, a glut of landlocked North American crude has reduced WTI’s reliability as a gauge of global oil demand.


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