OPEC Reference Basket
In January, the OPEC Reference Basket increased to $111.76/b, the highest monthly average since April. The rise in the Basket in January, a trend that had started in the last days of the previous month, was supported by bullish and better-than-expected US economic data and revived geopolitical tensions in the Middle East, which boosted the risk premium on crude oil prices. A weakening of the dollar against the euro provided some support; however, fears over weakening demand growth, stemming from concern about Europe’s economy and credit downgrades to some key European countries, limited the gains. On a monthly basis, the OPEC Reference Basket increased $4.42, or 4.1%, over December. Compared with the same month a year ago, the Basket was up $18.96/b, or 20%.
All the Basket’s components improved in January, with Venezuela’s Merey showing the most significant increase amid improving elements of the grade’s pricing formula. Merey increased by $6.33, or 6.22%, over the month. Middle Eastern light, medium and heavy grades showed the next highest gains, with noticeably better global performances of benchmark crudes in these grade ranges. Both Iran Heavy and Kuwait Export improved by $4.94, while Arab Light and Basrah Light increased by $4.86 and $4.15, respectively. Qatar Marine and Murban increased by slightly lower amounts, up $3.42 or 3.15%. Taken together, Brent-related crudes Saharan Blend, Es Sider and Bonny Light improved by 2.4% to average $111.93/b, an increase of $2.62, the lowest improvement over the previous month among all Basket components. Ecuador’s Oriente registered a gain of $3.12, or 3%, for a monthly average of $104.11/b.
Beside the general upward trend in the global crude oil market in January, the increase in Merey is in line with the sizeable improvement in fuel oil markets — an element in Merey’s pricing formula — which rose by over $8.00 in January. Middle Eastern crudes gained support from a strong performance by benchmark crudes, namely Dubai and Oman, due to record fuel oil cracks in the region. Fuel oil crack spreads in Asia turned positive, reaching the highest level on record for this time of the year, with strong demand from refiners, utilities and bunker markets stretching already limited supply.
The relatively lower performance of the extra light Middle Eastern crudes is attributed to low demand at the end of the heating season in the Far East and relatively low margins for middle distillates throughout January. In early February, the OPEC Reference Basket maintained the upward momentum, continuing to average above the key $110/b and settling at $115.18/b on the 8th of the month.
The oil futures market
Both crude oil futures markets ended January with gains. Front-month WTI settled above the key $100/b price for the first time since the disruption in Libyan exports in May. Meanwhile, ICE Brent reversed the losses of the previous month and witnessed the highest positive month-to-month movement in more than eight months. Better-thanexpected, bullish US economic data was a major factor behind the rise in prices in January. Moreover, revived geopolitical tensions in the Middle East, boosted the risk premium on crude oil prices. A weakening of the dollar against the euro provided some support. Nevertheless, fears over demand growth, stemming from concern about Europe’s economy and credit downgrades to some countries, limited gains. On the Nymex, front-month WTI improved by $2.15 to average $100.82/b in January, while ICE Brent also increased by a sizeable $4.06 to average $111.78/b, the highest level for six months. Compared with January last year, WTI was up by 12.6% and ICE Brent by 15.4%.
Oddly, front-month WTI was range-bound in January, trading in a very narrow window of $4.75/b, which represented a noticeable easing of the volatility that has been in the market since the beginning of last year. Indeed, the trading window almost halved compared with the $7.80/b seen in the previous month. Front-month WTI traded in first ten days of the month at around $102/b, then dropped to around the $100/b border in the second ten days and remained there to the end of the month. Similarly, ICE Brent trade was also range-bound, despite a sharp increase in the risk premium. In the first week of February, crude oil futures prices, particularly ICE Brent, kept their momentum with Nymex WTI settling above $100/b and ICE Brent moving above $115/b. On 8 February, ICE Brent stood at $117.20/b and Nymex WTI at $98.71/b.
Data from the US Commodity Futures Trading Commission (CFTC) showed a marginal increase in average net long positions held by speculators in US crude oil futures and options in January. Hedge funds and other large investors increased net long positions on the Nymex by 6,484 contracts to 200,251 lots, a gain of about 3.3%. Moreover, speculators also increased net long positions in ICE Brent futures by 7.3% to reach 89,593 contracts. This signified growing speculative interest in the ICE Brent market, despite the reduced money \ inflow into European commodity markets due to tightness in bank lending.
Daily average traded volume during January for WTI Nymex contracts increased sharply compared with the traditionally lower activity in December, up 116,180 lots to average 606,557 contracts or more than 600 mb/d. For ICE Brent, the volume also increased sharply by more than 30% to 518,293 contracts. Average daily open interest increased in both futures markets by 50,775 and 66,883 to reach 1.37 and 0.96 million contracts in WTI Nymex and ICE Brent futures, respectively.
The futures market structure
The Nymex WTI market structure steepened its contango in January, particularly at the front end of the curve, amid growing imports, coupled with lower demand that caused consecutive weekly builds in US crude oil stocks, as reported by the US Energy Information Administration (EIA). The first-month versus second-month time-spread averaged around 22¢/b, close to 10¢ wider from December. Meanwhile, ICE Brent’s market structure continued to narrow its backwardation, amid growing sweet crude supply, particularly from Libya. The spread between the second and first months of the ICE Brent contract averaged around 20¢/b in January, the lowest in four months, compared with 52¢/b in the previous month. It is worth mentioning that the physical Brent market had already moved into contango. The transatlantic (Brent vs. WTI) spread widened sharply in January, after three months of a narrowing trend, amid growing pressure in the WTI market. On average, the Brent/WTI differential was at $11.15/b in favour of Brent, which was $2 wider than in December.
The sweet/sour crude spread
The global light sweet/heavy sour differentials narrowed significantly in January, supported by healthy fuel oil cracks across the board as well as supply disruption concerns for heavy grades contrasted by abundant supply of sweet crudes amid lower demand. In Europe, particularly the Mediterranean, the spread between Urals and Dated Brent narrowed by almost $2.40/b from the beginning of January to the end of the month. Urals was supported by a strong fuel oil market, lower scheduled loading volumes and some concerns about oil trade to the European region. Meanwhile, the light sweet crude market in the North Sea came under pressure from growing supply and lower demand. Beside returning Libyan crude, the greater availability of West African crude due to refinery closures in the US and Europe weighed on the Brent market. Accordingly, Urals’ discount to Dated Brent in January dropped from over $7.70 on 1January to only 35¢ by the end of the month.
In Asia, light sweet/heavy sour differentials, represented by the Tapis/Dubai spread, narrowed by more than $3.80 in January. Similar to Europe, the performance of sour crude was supported by an unusually strong fuel oil crack, which even traded at a premium over Dubai. High demand for fuel oil for bunkers and utilities provided the major support for the fuel oil crack improvement. A supply disruption in Sudanese heavy sweet crude also led to some refiners substituting their needs with straight run fuel oil. As a result, Tapis’s premium to Dubai at the end of January narrowed to $8.40/b, compared with $12.25/b at the beginning of the month. Similarly, the Dubai discount to Dated Brent dropped by a significant $1.80 in January.
The US Gulf Coast’s sweet and sour grade spread, represented by the Light Louisiana Sweet (LLS)/Mars sour spread, narrowed in January, amid lower demand for light sweet crudes. Nearly 690 mb/d of refining capacity in the US East Coast has been put up for sale or closed. As these refineries processed mainly light sweet West African crude, the greater availability of these barrels was putting pressure on the entire Atlantic Basin light sweet complex. The LLS/Mars spread averaged $2.40/b in January, down from the previous month’s premium of $3.80/b, representing a sharp drop of $1.40.