The OPEC Reference Basket in October sustained the downward trend, which has prevailed since late September. While the Asian market soaked up more sweet crude, which widened the sweet/sour spread amid ample Mideast supply, the western market focused on arbitrage opportunities due to growing uncertainty over oil demand with several refineries remaining closed. The bearish sentiment persisted into the first week with US administration stating that it would tap its SPR for crude and heating oil if necessary. The Basket closed the first week at $56.55/b, a loss of nearly 2% or $1.08. This downward movement was triggered by the continued widened sweet/sour spread in the East. However, the bulls revived early in the second week on emerging winter fuel demand in Asia, while a refinery strike in France suspended potential buying interest. Prices were supported by IEA estimates of lower non-OPEC supply this year and growing global demand well into next year. This momentum was furthered by an EIA report echoing the IEA’s forecast of healthy demand and lower supply. In the second week, the Basket closed $2 or 3.5% lower at $54.55/b. The downward movement carried over from the previous week, supported by ample OPEC supply amid weakening gasoline demand in the USA. The sentiment reversed with the formation of Hurricane Wilma; however, this was short-lived as the storm changed its path away from oil operations in the Gulf of Mexico. A hefty build in US crude oil stocks supported the downtrend, while higher prices were said to be eroding demand amid a slow recovery in US Gulf Coast production. A larger-than-anticipated build in natural gas storage also supported the bears. Consequently, Basket edged lower in the third week, down a slight 45¢ or less than 1% to close at $54.10/b. Although the Basket experienced some bullish momentum in the fourth week, ample supply continued to ease the market. The OPEC Basket surged on concern over winter fuel supplies and stockpiling amid Total’s resumed operations in France, which prompted buying interest. Sentiment was furthered by bullish US stock data. In the final week in October, the Basket shed a further 78¢ or 1.4% to settle at $53.32/b.
After a volatile month, the Basket’s monthly average dropped a hefty 5.6% or $3.25 to settle at $54.63/b. The widening sweet/sour spread in Asia pressured Mideast crude amid uncertainty about demand due to refinery outages in the west. Moreover, the lingering possibility of a further tapping of strategic reserves only added to the downward momentum. Nevertheless, prices changed direction on the prospect of higher demand and lower non-OPEC supply. However, ample OPEC supply evidenced by higher US crude oil stocks kept the bearish trend alive. The Basket moved further downward into the first half of November on healthy crude oil stock-builds amid slower demand for gasoline and lower heating fuel requirements due to unseasonably warm weather in the Northern hemisphere. The Basket slipped well below the $55/b level to close at $50.01/b on 15 November.
The market emerged on a weaker note in October with nearly 20% of US refining capacity out of operation and all of US Gulf crude output shut following Hurricane Rita. The WTI/WTS spread widened by 63¢ to $5.72/b in the first week, while WTI closed at an average of $63.93/b or 2.7% lower. Moreover, additional barrels of Colombian sour grade were available for November delivery amid the continued slow recovery of the US Gulf Coast refining
system. The lower refinery demand resulted in rising crude oil stocks, which helped to push WTI down 1.7% in the second week, while the WTI/WTS spread widened a further 36¢ to $6.08/b. The closing of arbitrage opportunities across the Atlantic amid development of Hurricane Wilma kept pressure on sour grades. However, US Gulf Coast refineries began to recover, preventing differentials from widening further to some extent. In the third week, the WTI/WTS spread expanded to $6.32/b for a gain of 24¢ over the previous week with the WTI weekly average closing 0.5% lower at $62.51/b. The spread continued to widen into the final week of October on larger than expected crude oil supplies and as Hurricane Wilma avoided the energy facilities in the Gulf of
Mexico. WTI closed the fourth weekly period at $61.38/b for a drop of 1.8% with the WTI/WTS spread widening by 29¢ to $6.61/b after peaking at $7.71/b on 25 October due to concerns over winter fuels. However, during the final two days of the month, the spread narrowed to $5.50/b as refineries and oil output recovered from hurricane damage. The October WTI averaged $62.67/b or 4% lower, with the WTI/WTS spread widening $1.11 to $6.18/b.
The market in Europe was subdued by the uncertainty of the arbitrage barrels across the Atlantic amid refinery
closures in the US Gulf Coast amid unsold October barrels. The bearishness was furthered by a strike at
France’s Total refinery. Dated Brent averaged 3.7% lower the first week at $59.97/b, as the weekly average
slipped below the $60/b level for the first time since July. This sentiment firmed as all October loading cargoes
cleared ahead of the release of November-loading programme on the prospect of lower volumes. Nonetheless, a fall in gasoline and distillate demand in the Northern hemisphere pressured North Sea grades. Dated Brent slipped another $1.58 or 2.6% to average $58.39/b for the second week. Spot differentials continued to slip as prompt November cargoes remained unsold at the time of a continued rise in US crude oil stocks. Dated Brent edged 4¢ lower in the third week. The bears continued amid rising concern over higher freight rates. However, the resumption of oil operations at France’s largest refinery supported emerging demand, which was then undercut by yet another strike, this time at Rotterdam’s refinery. Hence, Brent continued to slide lower. Brent’s monthly average in October closed $4 or 6% lower at $58.75/b. Lower refinery intakes of light grades amid relatively strong refining margins for the sour grades supported firmer trade of the Russian Urals The market in the Mediterranean emerged on a strong note amid tight supply, which boosted demand due to the relatively attractive refining margins. Brent/Urals first weekly period spread narrowed by 71¢ to $3.08/b. Furthermore, with Total’s strike pressuring the light crude market, the Brent/Urals spread narrowed a further $1.29 to $1.79/b in the second week. However, as Urals became less lucrative, sellers lowered their offers in order to prevent refiners from switching to alternative grades. Refiners halted buying interest in the hope that price differentials would drop further. Thus, in the third week, the average Brent/Urals spread surged by $1.12 to $2.91/b. The bearish sentiment continued into the fourth week as sellers continued to offer lingering October barrels. Yet, plentiful supply amid high freight rates out of the Black Sea kept the pressure on. The Brent/Urals spread widened by another $1.10 to $4/b. Urals closed the month at $55.80/b for a drop of $2.43 or 4%. However, the Brent/Urals spread closed the month at an average of $2.95/b compared to $4.52/b for the previous month, the narrowest since June.
Far East market
The market for Mideast crude began bearish in October on higher OSPs. Oman raised the September OSP by 3¢ to a record-high of $57/b. The record level came as Oman raised its premium to Dubai to 46¢ for September, up from 37¢ in August. Hence, in the first week, December Oman was on bid at parity, down from 6¢ premium to the MOG at the end of September. Moreover, Abu Dhabi’s Murban was also under pressure
due to lack of interest for the kerosenerich grade amid overlaying November barrels. The November Murban
assessment slipped to a 50¢/b discount to the OSP. In the second week, healthy heating oil stocks in Japan amid ample supply from the Middle East pressured the market, yet the emergence of refiner buying interest supported the differential, preventing it from slipping further. While November Murban traded at a discount of 30-35¢/b on ample supplies, December Oman was steady at a 3-7¢/b premium to the MOG on the improved fuel oil crack spread. Due to continued healthy kerosene stocks amid sellers lowering their offers, December Murban emerged with offers at a 10¢ discount versus a 10¢ premium to the OSP, yet Oman remained at a 3-5¢ premium to the MOG. However, as sellers rushed to clear December barrels, buyers remained on the sideline given ample incremental supplies. December Oman flipped into negative territory to trade at -7¢/b to the MOG, yet December Murban remained at a 10¢/b premium following a buying spree for winter stockpiling amid seasonal demand for naphtha and middle distillates. The widened Brent/Dubai spread also contributed to the firming of differentials. Nevertheless, extra supply amid bearish demand sentiment pushed the market lower towards the end of the month. Oman traded at a 10¢/b discount while Murban was valued at minus 20-30¢/b.
The Asia/Pacific crudes emerged in a bullish note on strong demand for sweet grades amid placed November loading barrels and Thailand’s TPI buy-tender. In the first week, Indonesia’s November Minas was assessed at a premium of $0.95¢-1.00/b to the ICP while November Tapis was sold at 50¢/b to the APPI, compared to the previous level of a $1/b premium. Moreover, utilization rates at nuclear plants were low as Japan’s TEPCO plans to buy more oil for thermal power generation than it originally intended. Hence, Minas was assessed at $1.10/b to the ICP in the second week amid higher domestic refinery utilization rates. The bullish momentum was halted by the 60% decrease in buying interest from Indonesia’s Pertamina, which caused concern of an overhang of Asia/Pacific crude for December loading. Nevertheless, strong margins helped the bulls to revive as December Tapis was sold at $1.10/b to the APPI in the third week with Minas at $1.45/b to the ICP. Sentiments strengthened further on continued stockpiling of winter fuels amid seasonal naphtha demand for petrochemical plant feedstocks. Minas was assessed at a higher level of around $1.70/b to the ICP. The tightly supplied market continued to exert an upward pressure on the regional crude. Malaysia’s December Mutineer Exeter crude was sold at a premium of around $1.70-2.00/b to APPI. The Brent/Dubai Exchange For Swap (EFS) widened
towards month-end diminishing the flow of slower rival grades bound eastward.