OPEC Reference Basket
After three consecutive months of gains, the OPEC Reference Basket price fell in April to $118.18/b, although it retained high levels linked to risk premiums associated with the ongoing geopolitical concerns. The decline was primarily a reflection of the overall crude oil market sentiment during the first month of the typically low demand season in the second quarter of the year. Most physical crude oil markets showed signs of weakness in April, shifting into contango for the first time in over a year, at a time of high supply and weak demand. Losses in crude oil prices also occurred, as refined product prices came down from the peak levels reached in the previous months.
Moreover, rising production from OPEC Member Countries – in a bid to cool down prices and allow global inventories to build strongly – kept a lid on prices, causing them to move sideways throughout the month. Off and on bearish macroeconomic indicators from the US and China, as well as revived concern about the Euro-zone economy, pushing the euro down against the dollar, also helped dampen crude oil markets. The Basket price dropped to an average of $118.18/b in April, representing a decrease of $4.79, or 3.9%, from March. Nevertheless, the $117.66/b year-to-date average for the Basket is $12.38, or 12%, above that of the same period last year.
All Basket components decreased in April, with North and West African crudes and Middle Eastern benchmark grades showing slightly higher losses, compared with other grades. Brent related crudes — Saharan Blend, Es Sider, Bonny Light and Girassol — slumped by a significant 4.2% to $121.30/b, down $5.30 for the month. Meanwhile, Middle Eastern crudes Murban and Qatar Marine dropped by $5.29, or over 4.3%, to $118.92/b. Latin America’s Basket components — Ecuador’s Oriente and Venezuela’s Merey — showed moderate losses of $3.93, or 3.4%, to average $111.24/b. And components that are priced on multiple pricing markers due to their multi-export destinations, namely Arab Light, Basrah Light and Iran Heavy, lost 4% of their value in April to end the month at $117.63, which was $4.92 down from March.
The weak performance of the Basket’s components in April was a direct result of the poor sentiment in the international physical crude oil market. In the Atlantic Basin, Brent-related physical crudes in the North Sea and Mediterranean came under pressure, flipping temporarily into contango from ample available supplies, easing. West African differentials, additional loading volumes of Russia exports, refinery seasonal maintenance and economic run-cuts due to low margins. Sentiment in Asian markets weakened in April, also amid ample supply on top of weaker refinery margins. The longstanding Dubai market structure momentarily flipped into contango, reflecting the deteriorating sentiment on the spot market. Sour crude spot differentials fell across the board, as a reported supply glut kept the region oversupplied at a time when demand was low due to lacklustre refining margins. The Basket price stood at $109.85/b on 9 May 2012.
The oil futures market
Crude oil futures markets were down in April, after several months of progressive gains, but maintained resilience attributed to supply security fears, in spite of massive stock-builds. Prices, particularly with regard to the actions of the speculative community, were still being affected by the ongoing geopolitical factors and the potential disruption of trade flows. The New York Mercantile Exchange (Nymex) West Texas Intermediate (WTI) front-month price averaged $103.35/b in April, down only 2.7% from the average in March. US benchmark futures for WTI continued their slowpaced decline that had already started in March, amid sporadic bearish macroeconomic indicators coupled with consecutive weeks of sharp inventory builds, particularly in Cushing, Oklahoma, to reach record highs. The shaky performance of major US equity and global commodity markets also weighed further on the petroleum complex.
Meanwhile, the overall decline in international crude oil futures was also attributable to rising production and inventories held by OPEC Member Countries, which was seen as a move to keep a hold on prices for the sake of global economic recovery. Moreover, China’s lower-than expected quarterly economic growth and the modest slip in US consumer sentiment in early April, due to higher gasoline prices, also helped dampen crude oil futures. Amid additional pressure from revived concern about the downside risks to the Euro-zone economic outlook and political uncertainty, the ICE Brent front-month price fell by 3.3%, or $4.10, to average $120.49/b for the month. Price volatility was reduced further in April, since trading in both crude oil futures, WTI and Brent, was range-bound, particularly during the second half of the month. From mid-April on, Nymex WTI and ICE Brent traded in narrow windows with ranges of only $2.66 and $1.95 respectively, compared with a range of over $5 each in March. This signified easing volatility and thus lower speculative activity, compared with the previous months.
In contrast with last year, when risk premiums due to the disruption in Libyan production were at their peak, the front-month WTI year-to-date average price was up by nearly 5% at $102.94/b, while ICE Brent was more than 9% higher at $118.93/b. Crude oil futures prices fell sharply in the second week of May, when Nymex WTI settled below the key $100/b mark at $96.81/b and ICE Brent stood at $113.20/b on 9 May. Data from the US Commodity Futures Trading Commission (CFTC) showed that, on average, speculators reduced net long positions in US crude oil futures and options sharply in April, although they remained at record highs. Hedge funds and other large investors decreased net long positions on the Nymex by a hefty 48,894 contracts to 201,061 lots, a decrease of almost 20%. The data showed that almost all the decrease was attributed to the reduction in long positions, as crude prices steadily trended downward. Outright longs were down by a substantial 46,894 lots, while shorts were cut by just 2,066 lots, suggesting that money managers contributed to the price slide in April.
However, the large volume of net long positions held by speculators pointed to their persistent bets on rising oil prices going forward. For ICE Brent crude oil futures, speculators reduced net long futures and option positions by 16,204 lots during April to 124,553 contracts. The daily average traded futures volume in April for all WTI Nymex futures contracts decreased by a further 74,421 lots to average 529,528 contracts, or above 530 mb/d. Open interest decreased slightly to 1.561 million lots, on average. In contrast, for ICE Brent, the overall traded volume increased by 42,474 contracts to 592,582 contracts, while open interest rose by over 7% to 1.219 million lots.
The futures market structure
The Nymex WTI market structure widened its contango slightly in April, with the first month versus the second month time-spread averaging around 55¢/b, thus widening by 5¢ from March. Although this move was justified, considering the steady builds in inventory levels in Cushing, which were near record-highs, recent storage capacity additions have created a situation where this is no longer an alarming level. Meanwhile, the ICE Brent market structure narrowed its backwardation further, by over 30¢ to around 35¢/b, based on the average spread between the first-and secondmonth contracts during April. Lower demand for North Sea crudes during peak seasonal maintenance, coupled with ample supply of regional light sweet crudes, weakened the front end of the curve. However, once refiners finish their seasonal maintenance, this moderated backwardation structure is not expected to last, at a time of dwindling North Sea supply coupled with frequent arbitrage opportunities for Forties crude to South Korea. Over 600,000 b/d of idle European refining capacity are expected to return in June, while North Sea supplies of the key nine spot grades over the first five months of the year have declined y-o-y by almost 12%.
The transatlantic (Brent versus WTI) spread narrowed by over $3/b in favour of WTI during the second half of April. After the announcement of an earlier-than-expected reversal of the Seaway pipeline, now scheduled to start carrying oil at an initial rate of 150,000 b/d in mid-May, the Brent/WTI spread quickly contracted from levels of around $20/b to around $14/b on the back of this development.
The sweet/sour crude spread
Light-sweet/heavy-sour differentials were mixed during April, remaining stable in Asia and the US, but narrowing in Europe. In Asia, light-sweet/heavy-sour differentials were narrower around the middle of the month, supported by rebounding fuel oil cracks. The average high sulphur fuel oil cracks for Singapore in April were $2/b higher than the March average. This was countered by the improvement in Asian middle distillates, offsetting the gains for sour crudes. Subsequently, sour crudes came under pressure from soaring crude production figures from Middle Eastern producers, which actually caused the benchmark Dubai backwardation to practically disappear over the month. As a result, the spread remained virtually unchanged in April, with the Tapis monthly average premium to Dubai in April narrowing to $9.50/b, compared with a premium of 10/b in arch, a decrease of 50¢.
After falling to multi-month lows in late March, in Europe the Urals/Brent spread arrowed on the ack of strengthening Urals crude. The weakness of Urals seen in arch and much of April resulted n much stronger refining margins, prompting some emand for Urals. Although the price of Urals ell steeply after announcements of dditional loading volumes, the grade then reversed its fate nce again and its verage was 90¢ higher over the whole month, compared with the previous month, elative to Dated Brent. Urals was also supported by increased buying interest, due to ower April aintenance. The amount of European refining capacity made idle by aintenance dipped to just above 1 mb/d in April, vis-à-vis 1.47 mb/d in March. The US Gulf Coast (USGC) sweet and sour grade spread, represented by the LLS/Mars spread, was largely stable. Weakening differentials for West African crude and the recent decline in the gasoline crack weighed on the light sweet grade LLS. The medium-sour grade Mars was supported by improving fuel oil cracks, as well as by planned maintenance at the platform, starting on 15 May, and this will see output fall by as much as 50%, according to Shell. On average, the spread in April stood at $6.66/b, compared with $6.10/b in March, in favour of LLS.