The crude oil futures market started off strong in September, as a result of damage to the petroleum infrastructure in the US Gulf of Mexico by Hurricane Katrina. WTI averaged $67.99/b in the first week, a gain of 40¢ on concern over supply shortfall in both streams. The CFTC weekly report revealed that non-commercials reduced short positions by 6,500 to some 117,000 lots at a faster rate than longs which fell by nearly 2,000 to 141,000 contracts. As a result, net long positions closed nearly 5,000 higher at 24,100 contracts. At the same time, commercials also increased long positions by a significant 19,000 lots to 552,000 while the shorts were up 3,200 to 540,000 contracts. Nonetheless, open interest declined a moderate 16,000 to 898,000 contracts, slipping below the 0.9 million from the week before. Bullish momentum weakened following the emergency response by the IEA to release strategic crude and products to supplement the shortfall caused by Hurricane Katrina. Moreover, recovery of oil operations in the Gulf of Mexico has further calmed market momentum at a time when the IEA revised its forecast for lower-than-expected global demand in 2005. Hence, fund sell-offs for profit-taking in a volatile trade pushed the WTI front-month contract to close the second weekly period at an average of $63.88/b, plunging $4.11 or 6%. This was evidenced by the hefty 26,000 drop in noncommercial long positions while the shorts saw a build of 6,200 contracts. As a result, net noncommercial positions fell into the negative territory for the first time since end of May, dropping 32,300 lots as the shorts outpaced longs by 8,200 lots. Moreover, open interest continued to slide at a faster rate, decreasing by some 25,000 lots to 873,000 contracts.
In the third weekly period, the bulls were boosted by fears over low winter fuels amid hurricane-damaged refinery
operations and limited natural gas supply due to shut-in production in the US Gulf of Mexico. The market was
calmed on the expectation of higher OPEC output amid a slow-down in demand. Hence, the 6% fall of the gasoline futures contract on 16 September, on profit taking exerted downward pressure on the petroleum complex. However, looming Tropical Storm Rita in the Gulf of Mexico further ignited market concern over a supply shortfall as well as slowed efforts to restore oil operations after Hurricane Katrina in both streams. The futures market saw a reversal to the previous trade session on 19 September, with Nymex WTI jumping nearly 7% as gasoline futures surged well over 14% and heating oil was up almost 11%. Therefore, the weekly average closed $1.41 or 2.2% at $65.29/b. However, OPEC’s pledge of excess capacity amid the prospect of lower demand capped the earlier rally. The CFTC report showed non-commercials continued to reduce their longs with net shorts at 13,000 lots. Moreover, open interest saw another hefty drop of 26,000 lots to 847,000 contracts. In the fourth week of September, volatility continued on concern over slowing refinery demand amid fear of a petroleum product shortfall on prolonged refinery outages. While the closing weekly average was up a marginal 39¢ at $65.68/b, non-commercials continued to hold net short positions, with shorts continuing to hold an edge over longs for the third consecutive week at 26,300 lots with the longs dropping to 107,000 lots, their lowest level since mid-June and the shorts peaking at their highest level within the last three years at 134,000 lots. Open interest increased a marginal 5,000 lots to 851,000 lots. It is worth noting that the commercial longs increased by some 9,000 to 542,000 lots while short positions fell by 9,000 to 503,000 lots. The Nymex prompt month average closed 56¢ higher at $65.55/b over the August average on shuttered refineries and constrained natural gas output due to damaged facilities in the Gulf of Mexico. Moreover, while the Nymex front month price was 42% higher on average than last year, the open interest monthly average only saw a gain of 27% over the same period last year.
The forward structure eased in September to narrow the contango with the 1st/2nd month average spread
in September at –36¢ compared to – 73¢ in August. Healthy crude oil stocks in the USA kept the contango in
place. However, concern over tight product supply narrowed the gap as demand for winter fuels emerges at a
time when the major oil production and refining facilities were damaged in the US Gulf of Mexico. Moreover, the
preliminary data for monthly crude oil stocks reveals that September stocks were lower than August by some 13
mb at 308 mb. The contango narrowed away from the 18th forward month. The 1st/18th month backwardation widened to 6¢ compared to 2¢ in August, although this gap was mostly closed by month-end.
