The Crude Oil Futures Market Structure

Source: OPEC 8/10/2015, Location: Europe

Although all three markets remained in contango, the Brent contango widened over June by close to 25¢, to reach $1.31/b (M1-M3). A surplus of unsold prompt loading North Sea and West African crude cargoes has been putting prompt differentials under pressure. Supply has been strong and European and Asian refineries have not bought as much crude as expected. Strong production from the Buzzard field and the deferring of a maintenance shutdown to October from June has boosted supplies. The North Sea was also cluttered with tankers carrying cargoes that have failed to find buyers, despite European refineries running hard to take advantage of strong margins.

On the other hand, the WTI contango eased by almost 50¢/b, while the gap between M1 and M3 narrowed from $1.20/b to 70¢/b. Successive weeks of crude stock draws at Cushing, Oklahoma, higher US refinery runs and reduced incentive to import crude for storage amid narrower WTI intermonth contango have all reduced crude availability.

Expectations also persist that crude production is set to slow, supporting the WTI.

The Dubai market structure was flat over the month with the M1 to M3 space moving from minus 88¢/b to minus 82¢/b, a 6¢/b contraction. Firm demand from Asian refiners continued to support the Middle East crude market, but signs of higher arbitrage shipments to the region created pressure. Complex refining margins in the Singapore hub were holding well above average for the past year, boosting demand for crude, though Brent's narrowing premium to Dubai made some Asian refiners consider taking regional and Atlantic Basin cargoes instead.

The Brent–WTI (transatlantic) spread narrowed sharply from $6.25/b in May to $3.92/b in June amid stronger US refinery margins and higher refinery crude intake compared with Europe or Asia. Persistent oversupply in the Atlantic Basin, coupled with recent worries of the effect of the crisis in Greece on demand in Europe pressured the North Sea Brent market relative to WTI. The narrowing Brent–WTI spread reflected opposing market dynamics on either side of the Atlantic. This smaller discount of WTI to Brent is making foreign imports – which are commonly priced against Brent – much more attractive.

Struggling to find buyers, unsold cargoes of West African crude began to stack up, seeking a window of opportunity to return to the US market. Theoretically, the narrowing spread has made it about $2/b cheaper to import West African crude than to ship Bakken by rail from North Dakota.


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