OPEC Reference Basket
For the third consecutive month, the OPEC Reference Basket sustained its hefty month-on-month gain in March to settle at $122.97/b, the highest monthly average since the all-time high of July 2008. This amount was also above the key $120/b level that had not been seen since mid-2008. In addition to the lingering geopolitical risk premium, the increase was supported by supply glitches in Europe and East Africa. Upbeat economic data from the US and, to a lesser extent, China, together with speculative activity in crude oil futures markets, contributed notably to the rise in overall prices. Meanwhile, signs of adequate supply, higher refined product prices in major consuming countries, along with the readiness of Western governments to release strategic crude reserves and the slowing pace of global economic growth, particularly in the Euro-zone, did not affect increasing in crude oil prices.
The Basket rose a significant $5.49, or 4.7%, higher in March. Its 1Q12 average of $117.49/b was $16.22, or 16%, over the $101.27/b in the same period last year. Apart from Venezuelan crude Merey, all Basket components rose more or less equally in March, by almost $5. The Atlantic Basin Brent-related grades — namely Girassol, Saharan Blend, Es Sider and Bonny Light — increased by 4.8% to $126.61/b. These grades were sustained by a strong Brent market due to outages of major North Sea fields during the month, coupled with continuing arbitrage opportunities for North Sea crudes to South Korea on the back of a free trade agreement that allows this Asian country to import European crude without paying the 3% crude tariff.
Middle Eastern crudes Murban, Arab Light and Qatar Marine moved up by $5.84, or almost 5%, to $123.95/b. Despite near-record production levels from Saudi Arabia, growing evidence of stock-builds, open arbitrage from Europe and relatively weak fuel oil cracking margins, these grades found support from rising demand for Mideast crudes, as major Japanese and Taiwanese refiners prepared to return from maintenance. New complex refining capacity in China and India also supported Middle East medium-sour crudes at the expense of sweeter grades.
Ecuador’s Oriente gained $5.82, or 5.2%, over the month to average $118.26/b. The remaining Basket components, including Kuwait Export, Basrah Light and Iran Heavy, rose by $5.53, $5.75 and $5.85 respectively. Again this month, Merey showed the lowest increase, affected by modest improvements in some of its pricing formula elements, such as landlocked crudes West Texas Intermediate (WTI) and West Texas Sour (WTS). Merey averaged $112.07/b in March, an increase $2.81, or 2.6%, over the February figure, and continued to be the lowest Basket component.
The oil futures market
In March, crude oil futures prices rose further, with Nymex WTI increasing for the sixth month in a row and ICE Brent for the third. A bullish geopolitical environment, optimistic economic data – particularly from the US – supply outages in the North Sea and speculative activity remained the key drivers of these inflated prices. Meanwhile, signs of adequate supply, higher refined product prices in major consuming countries, along with the readiness of Western governments to release strategic crude reserves and the slowing pace of global economic growth, particularly in the Euro-zone, did not affect increasing in crude oil prices.
Adding to last month’s sharp gains, ICE Brent front-month prices increased by $5.53, or almost 4.6%, in March to settle at $124.59/b. This was the highest monthly settlement since the all-time record of $134.56/b in July 2008. Similarly, the WTI front- month rose by almost 4%, or $3.94, to average $106.21/b in March, which was the highest monthly average since the onset of the crisis in Libya in April 2011. Compared with the same period last year, ICE Brent was a hefty $12.86, or 12.20%, higher at $118.37/b, an all-time record for the first quarter of the year. The same was true for the WTI front-month, which gained $9.76 to average $101.40/b, contrasting with the $91.64/b of 1Q11.
WTI front-month traded in a much narrower window of $5.31/b (range-bound) in March, compared with the $13.45/b range of the month before. This signified eased volatility and hence reduced speculative activity compared with the previous month, but prices remained at high levels. The trading range tightened by more than 60%. WTI front- month traded in the first decade of the month (i.e. the first ten days of the calendar month) at around the $106/b, and continued at this level during the subsequent decades until expiry. Similarly, ICE Brent trade was also range-bound, trading within a range of $4.24/b for the entire month.
Data from the US Commodity Futures Trading Commission (CFTC) showed that speculators increased their net long positions in US crude oil futures and options positions marginally in March. Hedge funds and other large investors increased their net long positions on the Nymex by a modest 7,256 contracts, indicating lower hedge fund and money manager activity in March amid mixed trading sentiment, but continued to hold record high positions. This represented an increase of only 3%, very low compared with the previous month’s 21%, when hedge funds and money managers were very bullish on the contract. The net long positions averaged 249,955 lots in March, the highest level since April 2011.
The data also showed that both new outright long and short positions increased; but the latter was half as much, suggesting overall mixed sentiment on the market’s direction, but more backing for higher price movements. Outright longs were up by 13,710 contracts, while shorts rose by 6,453. US crude oil prices dropped from $108/b to $104/b in March, and then returned to $108/b, before ending the month at around $103/b. For ICE Brent crude oil futures, speculative activities broadly mirrored that of the US futures market.
The daily average traded volume for WTI Nymex front-month futures contracts decreased by a sharp 135,031 lots in March, erasing all the previous month’s gains to average 601,901 contracts, equivalent to more than 600 mb/d. Open Interest increased to 1.5 million lots, on average. The volume also decreased for the ICE Brent front month by 22,321 contracts to 550,956 lots, while open interest rose by over 4% to reach 1.1 million lots.
The futures market structure
Nymex WTI’s market structure deepened its contango further in March, with the first- versus-second-month spread moving from minus 40¢/b in February to an average of minus 48¢/b, representing a change of 8¢. Increased output from the Bakken, as well as substantially higher volumes of Canadian crude flowing into the US, which caused massive stock-builds at the WTI delivery point in Cushing, continued to deepen WTI’s market contango structure. Meanwhile, ICE Brent’s steep backwardation remained unchanged, as North Sea outages and arbitrage to Asia continued to keep the front end of the forward curve higher. The largest outage is currently at the North Sea Elgin platform, which accounts for around 15% of Forties’ production. On average, the spread between the second and the first month of the ICE Brent contract averaged around 70¢/b in March, unchanged from the previous month.
The transatlantic (Brent versus WTI) spread widened sharply again in March amid growing pressure in the WTI market, as supply disruptions and geopolitical factors continued to support the Brent market. On average, the front-month ICE Brent/Nymex WTI spread stood at $18.38/b, which was $1.53 wider than in February.
The sweet/sour crude spread
Light-sweet/heavy-sour spreads were mixed during March. The dated Bent/Urals and LLS/Mars spreads widened by almost $1.80/b in favour of the light-sweet crudes. Meanwhile, in Asia, the Dubai/Tapis spread widened by only 20¢, almost unchanged from the previous month. The light-sweet/heavy-sour differentials in Asia – represented by the Dubai/Tapis spread – were $10-11/b wider in favour of Tapis earlier in the month in a stable gasoline market, supported by regional bullish supply fundamentals emanating from a heavy spring maintenance season. However, the spread narrowed sharply, in favour of Dubai, to $8-9/b from the middle of the month, on the back of weakening middle distillate and naphtha cracks. Higher inflows of West African crude also put pressure on light-sweet grades, while higher buying interests, despite heavy seasonal maintenance for incoming complex refining capacities, supported the heavy-sour crudes.
In Europe, Urals’ crude differential to Dated Brent widened further in March to the highest level in ten months, to average around minus $2.90/b, compared with minus $1.05/b in the previous month. Urals came under pressure from low demand from European refiners amid higher outright prices, weak refining margins, weakening fuel oil cracks, seasonal maintenance and competitive Middle Eastern alternatives. Outages in some North Sea fields supported the widening of the spread, in favour of light-sweet crudes in Europe.
In the US, the Mars crude discount to LLS increased by around $1.80/b over the month to $6.10/b below LLS. Healthy gasoline cracks supported this widening, in favour of the light-sweet grade. Meanwhile, the spread came under pressure from increasing deliveries of Bakken and Eagle Ford shale crudes to the US Gulf Coast, as well as the higher availability of West African crudes due to the closure of Atlantic Basin refineries, particularly in the US East Coast. Higher inflows of Middle Eastern medium/heavy sour crudes also supported the widening of the spread.