OPEC Reference Basket
The bullishness dominated into July on several factors including US crude oil stock declines, tight supply from West Africa and an early indication of a healthy US economy. The month emerged on ongoing concern over gasoline supply amid refinery outages maintaining market bullishness. The upward sentiment was also fueled by tight Nigerian production of gasolinerich crude. The OPEC Reference Basket closed $2.37 or 3.5% higher to average $69.86/b in the first week of the month. The market sustained strength into the second week. Closed arbitrage opportunities for Western crude to flow eastward at a time of emerging refinery demand kept firmness in the petroleum market. Gasoline supply concerns remained the core issue in the USA firming oil prices. Tight supply from the North Sea due to maintenance at a time of UK pipeline problems added to supply outlet shortages. The Reference Basket closed the second week $2 or nearly 3% to average $71.86/b. Nonetheless, the market was volatile in the second week amid refiners increasing production to meet expected seasonal demand while bullish US weekly petroleum data kept alertness in place. Moreover, healthy signs of the economy in China, which were seen to prompt demand, and OPEC signaling its readiness to increase production if supplies were needed, kept calmness in the petroleum market. The Basket closed the third week a marginal 86˘ or 1.2% higher to average $72.72/b after peaking to an all-time high of $73.67/b on 20 July. The downward trend prevailed during most of the fourth week with OPEC keeping the alternative of boosting output on the horizon. Higher refinery run rates, which eased concern over seasonal fuels, and weak refinery margins along with a fire at ExxonMobil UK’s refinery implying abundant supply eased market sentiment. Nevertheless, signs of a healthy US economy outlook prevented prices from dropping further. The Reference Basket closed the fourth week with an average of $72.32/b, down 40˘ or 0.5%. In the final days of the month, the market was steady with the Basket closing at $72.40/b, up $4.52 from the end of June.
In monthly terms, the Basket closed July with a record-high average of $71.75/b, representing a surge of $4.98 or 7.5% over the previous month. Supply disruption from West Africa, a draw on the US crude oil stocks and strong US economic growth boosted the bullish sentiments of the market. A fire at ExxonMobil’s 326,000 b/d refinery in Fawley, UK, pressured the market momentarily. Over the first two weeks of August, the Basket lost almost $5/b to stand at $68.27/b on 13 August 2007 due to rising concerns about a possible US economic slowdown in the second half of 2007, fed by a lower-than-expected expansion in the services sector as well as a slowdown in job creation.
The US domestic crude emerged on a healthy momentum amid the return of some refineries from maintenance boosting output. However, the rise in US weekly refined products prevented the sweet/sour spread from widening further. In the first week, the WTI/WTS spread averaged 74˘ wider at $4.21/b. The sentiment was capped early in the second week with the outage of BP’s 250,000 b/d Whiting, Indiana, refinery which revived concern over storage capacity at Cushing, Oklahoma. Nevertheless, the higher refinery utilization rate on demand for light-end products helped firm sweet crude oil prices. News of the restart of a Midwest refinery supported the grade further. A wide Brent premium to WTI kept arbitrage opportunities for rival North Sea crude limited. In the second week, the WTI/WTS spread
averaged 23˘ wider at $4.44/b. The sentiment was weaker in the third week, amid slower demand for light-end products, as refiners revamped production. The narrowing Brent/WTI spread attracted the inflow of more foreign crude and pressured the light crude. Nevertheless, a surprise drop in the US gasoline stocks kept the sweet/sour spread from widening further. The WTI/WTS spread inched up 8˘ to $4.52/b. In the fourth week, weaker refinery spreads and as the forward market steepened into backwardation kept the sweet/sour spread at its widest level in the month when it peaked to $5.40/b. Nevertheless, news that BP’s Whiting, Indiana, and Texas City refineries would not return to full capacity until next year exerted downward pressure on the sweet grade. Furthermore, a refinery outage in the UK implied that ample North Sea barrels could flow eastward. Thus, the Brent/WTI premium narrowed prompting the flow of rival grade across the Atlantic. Hence, the light grade was under pressure with the WTI/WTS spread 18˘ wider at $4.70/b. In monthly terms, WTI averaged $69.54/b for a gain of $5.62 or nearly 9% with the spread over WTS at $4.44/b, 92˘ wider.
North Sea market
The North Sea market emerged in a quiet note as the short-term swap structure moved into backwardation amid prompt demand. The market also digested Platt’s de-escalator to reflect sulphur content in the crude. Nevertheless, tight supply due to maintenance of the Forties and Statfjord oil fields helped differentials to firm with outright prices at record-highs since August last year. Unsold July stems maintained the balance in the regional market in the first week. However, when the emerging North Sea loading programme showed Forties crude oil stream set to load in August at around 445,000 b/d, down 174,000 b/d from July, the sentiment of tight supply was supported. The closure of BP’s UK Central Area Transmission System (CATS) gas pipeline, which is expected to take weeks to repair after a ship damaged a gas import pipeline, affected oil production. Thus, regional North Sea crude remained firm into the second week. Market sentiment strengthened into the third week with physical crude rising to multi-year highs. Nonetheless, with the structure of the forward curve, refineries were filled with first-decade August loading and momentarily refrained from procurement thereafter. Market sentiment weakened on poor refining margins in the fourth week with buyers remaining on the sidelines. Thus, the short-term swap softened as concern over prompt supply eased. Nevertheless, differentials remained steadily firm. Dated Brent closed July at $77.08/b, representing a gain of $3.57 from the end of June, to average $77.01/b, an increase of $5.46 or 7.6%.
Urals was firmer in North West Europe on prompt demand while sentiment was weaker in the Mediterranean on poorer refining margins. The market sentiment came under further pressure as Iraq offered a sell-tender of rival Kirkuk crude for the first time in months. Nevertheless, strong buying interest for late July barrels supported the grade. Urals discount to Dated Brent averaged $3.82 or 43˘ firmer in the first week of the month. The sentiment continued into the second week as late July stems cleared with tight supply in the North Sea prompting refiners to look for alternative grades. Limited availability of prompt supply weighed on weak refining margins, thus the average Brent/Urals spread was $1.05 narrower at $2.77/b in the second week. Nevertheless, an escalation in Dated Brent prices squeezed refinery profit margins in Europe. Hence, Urals differentials were weaker in the third week with the discount to Brent 19˘ wider at $2.95/b. In the fourth week, although a regional major was seen bidding up the market, weak refining margins continued to dump the sour grade amid a steepening backwardation in the forward structure. Hence, buyers stayed on the sidelines in an attempt to pressure differentials. However, emerging August loading programmes revealed lower exports from the North Sea preventing discounts from widening further. The fourth week showed that Urals discount to Brent was $3.07/b or 12˘ wider. The monthly spread for Urals discount to Brent was $3.11/b or 61˘ narrower from June.
Middle Eastern market
The Mideast crude market emerged on a weaker note amid high retroactive prices, although a steeper Oman discount to Dubai supported market sentiment. Moreover, emerging demand for winter stockpiling on the horizon kept the sentiment somewhat firm in Asia. In the first week, September Oman and Abu Dhabi Murban were assessed at an 8-10˘/b premium to DME and ADNOC’s OSP respectively. The market remained strong into the second week amid closed arbitrage opportunities as the wide Brent/Dubai EFS spread limited the flow of rival western crude. Higher refinery demand on expected summer fuel consumption helped the Mideast grade to remain firm while a Mideast major kept supply to Asia steadily unchanged. In the second week, Abu Dhabi September Murban was assessed at a 40˘/b premium to the OSP while Oman was valued at a 30-40˘/b discount to Dubai. The flow of western crude into Asia was subdued on the two-year wide Brent/Dubai EFS spread tightening arbitrage economics in the third week. September Oman was assessed firmer at a $25˘/b discount to Dubai. The market focused on a likely boost in oil demand from Japan following Tokyo Electric Power Co.'s shutdown of a major nuclear power plant after the earthquake. Hence, the Mideast forward structure turned into backwardation for the first time since July 2005, signaling tightening markets amid emerging demand. In the fourth week, news that Oman cargoes looked heading westward added to concern over prompt supply. Hence, October Oman was heard traded at a 10- 13˘/b premium to DME. Nonetheless, the narrowness of the Brent/Dubai EFS revived the opportunity for western barrels to flow eastward. Yet, October Oman was firmer when valued at a 20˘/b premium to DME in a quiet market as participants awaited the retroactive July OSP. The Brent/Dubai spread averaged $7.52/b in July, a gain of $1.76, the widest spread in two years.