The Crude Oil Futures Market

Source: OPEC 2/19/2013, Location: Europe

The two major international crude oil futures on both sides of the Atlantic moved upwards in January to their highest level in several months. The WTI front-month averaged nearly $95/b for the first time in nine months. ICE Brent also ended the month gaining to its highest monthly average since September. Besides the agreement to avert the so-called US fiscal cliff, which triggered a crude price rally, several bullish factors supported crude oil markets in January. The wider oil complex was buoyed by confidence over the global economy, particularly as the latest manufacturing data from China was encouraging.

Positive data also emerged from the US and the struggling Euro-zone. Steady job creation and expanding manufacturing activity in the US provided another anchor. This financial optimism stimulated a large wave of speculative buying in the oil futures market, helping to accelerate the price move upward. Hedge funds and other large speculators raised their bets on higher crude oil prices for the eighth straight week, increasing bullish positions to the largest since September. The growing economic optimism has been most apparent in global stock markets and Purchasing Managers’ Indexes (PMIs).

The S&P 500 is now near its alltime closing high and JP Morgan’s Global Manufacturing PMI is at its highest level in ten months. Meanwhile, the WTI price rose in mid-January owing to the return of the expanded Seaway pipeline from the WTI pricing hub Cushing to the USGC. The pipeline’s capacity expanded to 400 tb/d on 11 January, adding another 250 tb/d of pipeline capacity. The uplift in the WTI price signaled confidence in the greater light crude takeaway capacity out of the oversupplied Mid-Continent. In the meantime, open arbitrage to the Asia-Pacific and production glitches underpinned the North Sea market. ICE Brent prices were also sustained by geopolitical tensions and prospects for future supply disruptions increasing as a result. Finally, the healthy refined product demand also added to the bullish oil market sentiments in January.

On the Nymex, the WTI front-month improved by 7.5%, or $6.60/b, the largest monthto-month gain since November 2011, to average $94.83/b in January. However, compared to January 2012, Nymex crude futures were $5.50 lower. On the ICE exchange, the Brent front-month, to a lesser extent, also increased in January by almost 2.90%, or $3.11, to average $112.32/b, the highest monthly average in 4 months. In January, ICE Brent registered a higher value compared to the same period last year, improving by 84˘.

Crude oil futures prices kept their upward momentum as Nymex WTI stood at $97.03/b and ICE Brent at $118.13/b on 11 February.

In the week to 29 January, hedge funds and other large speculators raised their bets on higher Nymex crude oil prices for the eighth straight week, the longest stretch since 2006 and the highest postion since September, data from the US Commodity Futures Trading Commission (CFTC) showed. Compared to the end of December, money managers increased combined US crude oil futures and options positions in New York by a hefty 68,711 net long contracts, or 45%, to 218,604 lots in the week to 29 January. Moreover, by the end of January, hedge funds and other money managers increased bullish bets on Brent crude to their highest level in two years, data from ICE futures shows.

Speculative bets that prices will increase in futures and options combined outnumbered short positions by 179,735 lots. This is the highest number of net long positions since January 2011, the earliest date for which data is available. The gain of 25,822 contracts, or 17%, is also the biggest since records began. Furthermore, amid increasing speculative buying in the oil futures market, open interest volume (OIV) for the two major contracts increased almost 10% by the end of January to 4.01 million contracts, compared to 3.65 million contracts at the end of the previous month.

The daily average traded volume during January for WTI Nymex contracts increased by 151,635 lots, or 35%, to average 582,426 contracts or more than 580 mb/d. For ICE Brent, the volume also increased by 164,458 lots, or 37%, to 604,442 contracts, surpassing the WTI volume by more than 22,000 lots.


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