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The Crude Oil Futures Market

Source: OPEC 9/2/2012, Location: Europe

Crude oil futures prices recovered in July from the significant record low levels reached in June, although most of the fundamental reasons behind the fall are still at play in the market, as economic outlooks continue to worsen, while global stocks remain somewhat high. Economic woes continued to dominate the headlines, led by the International Monetary Fund’s (IMF’s) downgrading of global growth for both 2012 and 2013. Growth has slowed not only in troubled OECD countries, but also in key non-OECD economies, such as China, India and Brazil. The massive stock-builds over the first half of the year are still in play, although they are beginning to decline.

China, in particular, appeared to have ramped up crude-buying for storage. According to official statistics, the country had an implied stock-build of .d in the first half. This build is very much in line with the country’s strategic storage objective, as well as with the high Middle Eastern production seen in the first half. Nevertheless, the resurfacing of geopolitical tensions, production glitches in the North Sea, successive large crude oil inventory-draws and optimism that the world’s major economies would act to ease monetary policy to revive economic growth were the main reasons for the recovery in an already oversold market in July.

Positive economic data from the US and China, although limited, was seen as an optimistic sign that pushed prices higher in most asset classes, including crude oil. Additionally, increasing money-managed long positions also reflected the bullish sentiment in the global crude oil futures markets. Intercontinental Exchange (ICE) Brent front-month prices increased in July by $6.80 or over 7% to settle at $102.72/b, back above the significant $100/b mark, after briefly retracting from this level last month.

Similarly, the WTI front-month price rose by 6.7% or $5.53 to average $87.93/b in July. The year to-date average of $112.07/b for the ICE Brent front-month was almost identical to that of the same period last year, namely $111.98/b. On the other hand, WTI’s front-month year-to-date average value was $1.45/b lower than that of last year, at $96.74/b, indicating a 1.5% decline from the same period last year. Crude oil futures prices kept their upward momentum in the first week of August, when New York Mercantile Exchange (Nymex) WTI settled at $93.35/b and ICE Brent moved up to $112.14/b on 8 August.

Data from the US Commodity Futures Trading Commission (CFTC) showed that speculators reversed their last-month’s trading patterns and increased net long positions in US crude oil futures and options positions in July to 140,636 lots. Hedge funds and other large investors increased their net long positions on the Nymex by 16,620 contracts, indicating higher hedge funds and money-manager bullish trading activity in July. This represented an increase of 14%, compared with a decrease of 10% last month, when hedge funds and money managers were bearish on the contract. The data also showed that both new outright long and short positions increased at the same rate. Speculator activity in ICE Brent crude oil futures and options was seen as significantly more bullish on the upward momentum, as the 50% month-on-month increase in net long futures and options positions in July signified. The net long futures and options positions contracts for ICE Brent crude oil increased by 25,398 lots to stand at 77,510 contracts at the end of July.

The daily average traded futures volume during July for WTI Nymex front-month futures contracts decreased by a sharp 82,311 lots, to average 517,326 contracts. In addition, open interest fell to 1.4 million lots, on average. For ICE Brent front-month, the volume also decreased by a large 117,453 contracts to 593,272 contracts, while open interest decreased marginally to reach 1.2 million lots. It is worth noting that ICE Brent crude oil futures continued to gain market share over WTI Nymex, with the former volume surpassing the latter for the third consecutive month. In terms of open interest, Nymex WTI was still ahead, but ICE Brent was rapidly closing the gap.

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