OPEC Reference Basket
The OPEC Reference Basket has been revised to include Angola’s medium sweet Girassoal crude (30.8? API and 0.34% wt sulphur) as of 1 January 2007. As a result, prices are slightly higher compared to the former Basket.
The OPEC Reference Basket emerged in August on a volatile note amid signs of a healthy economy. The return of Brent’s premium to WTI supported parcels to move westward. Nevertheless, a flip in the forward structure into backwardation is foreseen to permit stock-draws lessening procurement at a time when prospects of higher prices might dent demand. In the first week, the average OPEC Reference Basket saw a marginal rise of 7˘ or 0.1% to settle at $72.50/b. The bearishness dominated in the second week amid furthered concern over the weak economic outlook as fallout from developments in the US sub-prime mortgage sector was seen as having the potential to trigger an economic slowdown which could impact energy demand. The Basket closed the second week more than 5% lower for a loss of $3.88 to settle at $68.62/b. Worries that Hurricane Dean might disrupt Gulf of Mexico oil operations amid depleting US crude and gasoline stocks and a recovery in the equity markets strengthened the market. However, the momentum was short-lived as the equity market tumbled again while concern over Hurricane Dean faded away as the storm headed to Central America. In the third week, the average Basket dipped a marginal 57˘ or 0.8% to settle at $68.05/b. Easing concern over Hurricane Dean continued into the fourth week shaving most of the supply fear premium amid a stockpile in US crude oil. The Basket closed the week with an average of $67.21/b, slipping 84˘ or 1.2%. The sentiment flipped in the final week on concern over seasonal supply amid refinery problems and depleting stocks towards year-end. Moreover, recoveringEuropean refining margins supported price firmness. In the final week of the month, the Basket averaged $1.45 or well over 2% higher to settle at $68.66/b.
In monthly terms, the OPEC Reference Basket declined 4.4% or $3.18 to settle at $68.71/b. Concern that economic risks and tumbling equity markets might dent demand for energy offset the drop in seasonal fuels amid refinery outages and continued draws on crude oil stocks.
The market sentiment shifted in the first week of September amid potential refinery problems, and the continuing Atlantic storm season. Revived Mideast geopolitics and crude oil stock draws kept the bullishness intact. Due to the lack of fresh developments, the market shifted focus to steady OPEC output and the expected outcome of the Ministerial Meeting on 11 September. The Basket was $2.71 or almost 4% higher to settle at $71.34/b. The OPEC Meeting of the Conference raised output by 0.5 mb/d in an effort to calm fear over a supply shortfall amid depleting stocks in a backwardated market. Nevertheless, pipeline attacks in Mexico and larger-than-expected draws on US crude and gasoline stocks prompted prices to escalate and reach record-highs. The Basket closed at a new record of $74.64/b on 13 September to average $72.35/b.
The US crude market firmed on the return to operation of some refineries while the Atlantic Basin spread widened prompting inbound barrels. Sweet crude differentials weakened as the forward curve flattened. However, the WTI/WTS weekly average spread was 47˘ narrower at $4.23/b amid demand for light-end products. Nevertheless, a healthy build in US product stocks the week before amid the continued narrowing of the forward curve kept light crude under pressure. The widened WTI/Brent spread attracted the flow of transatlantic arbitrage barrels. In the second week, the average WTI/WTS spread was 49˘ wider at $4.72/b. Sweet crude differentials continued to slip amid the WTI/Brent spread narrowing from recent highs. Worries continued on reports of weak economy denting demand. Refinery problems came up while the tropical storm was projected to head to the US Gulf Coast. In the third week, the average WTI/WTS spread was $1.15 wider at $5.87/b. However, Hurricane Dean spared oil operations while trade was quiet amid book-squaring upon futures contract expiry. The weekly average was 11˘ narrower at $5.76/b after peaking to $6/b. The final week saw continued firmness in light grade amid demand for light-end products while refinery outages sustained. Concern over a potential hurricane in the US Gulf of Mexico kept alertness in place. In the final week, the WTI/WTS spread averaged $5.52/b or 24˘ narrower. In August, WTI averaged $72.34/b representing a decline of $1.61 or over 2% to narrow the premium to WTS by 4˘ to average $5.27/b.
North Sea market
Differentials for the North Sea crude generally emerged steady in August as the front end of the swap eased as concern over prompt supply was alleviated. Brent premium to WTI eased in the first week prompting outbound barrels across the Atlantic. The weekly average WTI/Brent spread was 31˘/b, for the first time since March. Although ExxonMobil restarted its Fawley, UK, 326,000 b/d oil refinery after an unplanned shutdown following a fire in July, the return of some oil fields from maintenance adding barrels to theSeptember loading programmes kept pressure on the North Sea market. Hence, equity holders were prompted to clear prompt barrels ahead of the emergence of new programmes. Sellers were seen lowering offers amid clearing cargoes ahead of an additional 130,000 b/d North Sea barrels in the September programme. In the second week, the average WTI/Brent spread averaged 89˘ firmer at $1.20/b. Brent remained under pressure, although improved refining margins and a decent contango structure prevented regional crude from slipping further. In the third week, the Brent discount to WTI widened by another 71˘ to $1.91/b. Sentiment was firmer into the fourth week amid clearing prompt September stems on solid demand. The WTI/Brent spread was nearly unchanged when it was 2˘ narrower at $1.89/b. Continued healthy demand amid improved refining margins helped North Sea crude differentials to remain strong. Nevertheless, in the final week the WTI premium to Brent widened by 61˘ to $2.50/b due to supply shortages in the USA. The monthly average of Brent was $70.74/b, down $6.27 or 8%, flipping into a discount of $1.63/b to WTI for the first time in five months.
The Urals crude market emerged on a firm note in August amid lower exports fromNovorossiysk. However, weaker refining margins prevented further firmness. In the first week, Urals discount to Brent averaged $2.60/b or 47˘ firmer. However, sharply lower Azeri oil exports from the Baku-Ceyhan pipeline at 433,000 b/d in September from 742,000 b/d in August helped regional grades to rebound in the Mediterranean. Hence, in the second week Urals average discount to Brent was 88˘ firmer at $1.72/b. Moreover, the increase in price differentials to Europe by a Mideast major helped regional crude to firm further at a time when refining margins rebounded, although the drop in the financial markets alerted economic worries keeping the grade from further firmness. Brent premium to Urals was narrower to average $1.31/b in the third week, down 41˘. Tight supply in the Mediterranean and healthy refining margins continued to support the grade while refinery maintenance in the North and higher shipments from Primorsk in September moderated demand in North West Europe. The Urals discount to Brent narrowed a further 17˘ to average $1.14/b. Nonetheless, lower-than-expected exports from the Baltic Sea firmed the grade in the North while firmness continued in the south amid healthy demand on above average refining margins. In the final week, the Brent/Urals average spread was nearly unchanged at $1.16/b. in monthly terms, Urals averaged $69.25/b, representing a loss of $4.65 or 6.3%, while the discount to Brent rose $1.62 to $1.49/b, a level last seen in 2003.
Middle Eastern market
The market emerged in a quiet note amid the usual “wait and see” stance for the retroactive prices for Mideast benchmarks. Nevertheless, the Brent/ Dubai EFS widened to a nearly 15-month high undermining the economics for western crude to flow eastward. Healthy crack spreads supported Mideast crude. Oman was assessed at a $0.80-1/b premium to Dubai amid an emerging contango spread. In the first week, the average Brent/Dubai spread was $6.80/b or 38˘ wider, although higher price differentials from a Mideast major did not dampen demand due to limited alternatives. In the second week the easing Brent/Dubai spread was down to nearly half at $3.68/b supporting the opening of arbitrage opportunities which were seen pressuring October differentials. Nonetheless, strong demand prompted October Murban and Oman to trade at premiums of 40˘ and $1/b to their respective OSPs. Planned oil field maintenance in Abu Dhabi with a potential to cut output by as high as 810,000 b/d for three weeks in November kept alertness in place. October Abu Dhabi Murban was assessed at a 55-60˘/b premium to OSP. Nevertheless, the easing of the average Brent/Dubai spread by 22˘ to $3.46/b supported the opening of arbitrage opportunities. The spread narrowed further to $1.64/b in the fourth week amid lingering prompt barrels calming market sentiment. Yet, unexpected prompt demand from Japan maintained a firm premium while the Brent/Dubai spread widened to $2.98/b in the final week. The monthly average Brent/Dubai spread was $3.38/b compared to $7.52/b in July.