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The Oil Futures Market - Aug 07

Source: OPEC_RP070806 8/14/2007, Location: Europe

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The volatility in the futures market resumed on mixed weekly US petroleum data revealing a rise in crude oil stocks in late June while seasonal fuel stocks declined. While refineries were seen to boost production to meet seasonal fuel demand, refinery glitches fueled market sentiment as the Coffeyville, Kansas, 108,000 b/d refinery was shut due to a flood. On the other hand, the prospect of depleting crude oil stocks was seen keeping sentiment firm. Nymex WTI closed the first weekly period at $71.41/b, up $3.64 or 5.4% with the weekly average up $1.75 or 2.5% to settle at $70.34/b. The CFTC reported that non-commercial net long volume was inflated by a hefty 29,000 to 96,100 contracts, the highest in almost a year. Open interest closed nearly 64,000 lots higher to approach the 1.5 million level. With options included, open interest closed the first weekly period 123,700 lots wider at 2,440,000 contracts.

In the second weekly period, revived concerns in Mideast and West African geopolitics along with concern over gasoline supply this summer kept alertness in the marketplace. Nymex WTI closed the second weekly period at $72.81/b for a gain of $1.40 or nearly 2% and averaged the week up $2.07 or 2.9% to stand at $72.41/b. Hence, the CFTC reported that the non-commercial net long volume was 16,100 wider at 112,300 lots while open interest was inflated a further 46,500 to 1,546,400 contracts. With options included, open interest rose 93,000 lots to a record of 2,533,300 lots.

In the third weekly period, noncommercial net long volume was some 2,800 lots narrower at 109,400 amid a drop in the long positions from a record peak. Open interest was a marginal 3,000 lots wider at 1,549,400 contracts, an all-time high. Including options, open interest was 79,600 narrower at 2,453,700 contracts. Eased concern over gasoline supplies in the USA prompted fund sell-offs for profit-taking. Tight North Sea output due to seasonal maintenance and production problems kept the marketplace balanced. Nymex WTI closed the third weekly period at $74.02/b for a gain of $1.21 or 1.7% to average up $1.02 or 1.4% higher at $73.43/b. The bullishness continued into the fourth weekly period, amid persistent concern over gasoline supply in the USA and signs of healthy economic growth in China. Outages from Angola added to market bullishness. Nevertheless, OPEC signaling its readiness to boost production if warranted supported market calmness. The Nymex WTI front-month closed the weekly period 46¢ lower to settle at $73.56/b, while the weekly average was $1.57 or over 2% higher at $75/b. The CFTC reported that noncommercial net long positions were some 600 lots narrower at 108,800 lots as shorts rose at a faster rate than longs. In contrast, open interest was 63,700 lots narrower at 1,485,700. With options included, open interest was a marginal 13,500 lots narrower to stand at 2,440,200 lots.

In the final weekly period, the non-commercial net long positions were inflated by a hefty 18,700 lots to a new high of 127,500 lots amid record longs which increased by 11,500 to 264,400 contracts. Open interest peaked once again over 1.5 million lots when it was 35,500 lots wider at 1,521,200 lots. Including options, open interest was inflated by a hefty 125,900 lots to an all-time record of 2,566,000 contracts. The market resumed volatility in the final weekly period on concern over crude oil supply and ExxonMobil UK’s refinery outages, while equity market turmoil sent a weak signal about the health of the global economy, which could dent petroleum demand. Hence, fund sell-offs for profit-taking kept the marketplace balanced before reviving once more on the recovery in the US economy offsetting earlier signs. The Nymex WTI frontmonth closed the week at a record of $78.21/b to gain $4.65 or 6.3%. The final weekly average was $76.58/b for a gain of $1.58 or over 2%.

In monthly terms, the Nymex WTI front-month contract averaged $74.15/b in July for a gain of $6.62 or nearly 10%, but remained 34¢ lower than last year. A draw on crude oil stocks and revival in the Mideast and West African geopolitical arena kept jitteriness in place. On the other hand, OPEC’s willingness to increase supplies if warranted by the market, along with the weaker economic outlook, prevented market sentiment from strengthening further. The monthly average of non-commercial net long positions in July was 47,300 lots wider at a record 110,800 contracts which made them some 55,800 lots higher than last year. Open interest averaged 91,700 lots wider at a record of 1,520,500 lots, a gain of 467,300 lots over the same period last year. Including options, open interest averaged nearly 2.5 million contracts for a gain of nearly 193,000 lots over the previous month and 807,200 over last year. Net longs in the noncommercials including option were 149,200 lots which was 49,700 lots higher than in June and 56,200 over last year.

In the first days of August, following the recent bearish developments in the stock market, energy market players also changed their position significantly in the week ending 7 August. Indeed, the volume of open interest for crude fell by 16,420 to 1,504,817 contracts, while non-commercial decreased their long positions by about 33,500 lots compared to the previous week.

The Forward Structure
The forward curve narrowed in the near months while the structure in the farther months changed. Nymex WTI 1st/2nd month spread averaged 5¢/b in contango in July, while the 1st/6th, 1st/12th and 1st/18th month spreads flipped in backwardation at 59¢, 96¢ and $1.26/b respectively, the first time since November 2004. Although weekly crude oil stocks averaged 350,000 mb, which was some 2.3 mb above last month and 15 mb above last year’s level, the recent four-week consecutive draw, which accumulated to 9.5 mb, sent fear over tight supply. Prompt refinery procurement is anticipated to boost run rates to meet seasonal fuel demand after recent planned and unexpected outages. Nevertheless, crude oil inventory depletion is foreseen behind the recent backwardation structure, especially at Cushing, Oklahoma.

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