Crude Oil Price Movements - Dec 12

OPEC Reference Basket
In line with global crude oil prices, the monthly average price of the OPEC Reference Basket slipped for a second month in a row in November, despite a late-month improvement in the global figure. Lingering concern about the struggling world economy and its impact on oil consumption weighed on prices earlier in the month. However, from mid-month on, the focus shifted back to concern about disruptions to Middle East supplies following a flare up of geopolitical tensions in the region. Furthermore, crude markets continued to balance up risks to demand from the United States’ ‘fiscal cliff’ ($600 billion in automatic budget reductions and expiring tax cuts at the end of 2012) against concern about disruptions to Middle East supplies.

The Basket fell by $1.50 to settle at a monthly average of $106.86/b in November, i.e. down 1.38%, but remained above the key $105/b level. Year-to-date, the Basket averaged $109.76/b, compared with last year’s average of $107.44/b for the same period, a y-o-y increase of $2.32/b or 2.15%.

Among the Basket’s components, Venezuela’s Merey dropped by far the most, losing more than 4% of its value in a month. The ongoing weakness of West Texas Sour (WTS) affected the performance of Merey, since this is an integral part of the US Gulf Coast’s pricing formula. The Midland Texas WTS discount to WTI Cushing has been widening throughout the year in line with higher production in Midland Texas and lower take-away capacity; this was confirmed by US Energy Information Administration (EIA) data for August which put total Texas crude oil production up over 500,000 b/d y-o-y, with the overall level exceeding 2 mb/d for the first time since 1988. The differential reached record levels, with WTS last assessed at minus $22/b to WTI Cushing, implying an outright price of less than $65/b. While a trend of gently widening differentials can be corrected for via the pricing formula monthly “k” adjustment factor – with the volatility exhibiting $10+ price-swings – it cannot be accounted for when setting prices on a prospective basis.

Following the weakness in the benchmark, African crudes also dropped, despite continuing problems with light sweet crudes in the North Sea and West Africa. The Buzzard field had been in extended maintenance until late October, and after it had come back, it had to be shut down again temporarily, causing delays for many cargoes and tightening volumes available to the European market. At the same time, Nigerian crude production suffered from a combination of natural disasters, oil theft and sabotage to the oil infrastructure. Meanwhile, falling demand for gasoline and naphtha undermined buying interest for North African light sweet crudes. The Middle Eastern Basket-component crudes were supported by healthy Asian demand, particularly for distillate-rich grades. Their prices slipped the least over the month.

The Basket’s Latin American components, Ecuador’s Oriente and Venezuela’s Merey, averaged below $100 for the second month in a row. Merey plunged $4.22 to $93.28/b, while Oriente slipped $1.59 to $97.15/b. African grades Saharan Blend, Es Sieder, Bonny Light and Girassol or Brent-related crudes fell by $2.24 to an average of $109.55/b, i.e. down by 2% from last month. The multi-destination Basket components, namely Arab Light, Basrah Light, Kuwait Export and Iran Heavy, lost almost 1% in November to $106.89, representing a drop of around $1/b from the previous month. Meanwhile, the Middle Eastern crudes Murban and Qatar Marine also fell, by almost 1.5% or $1.59 to an average of $108.41/b.

On 10 December, the Basket price stood at $105.01/b, $1.85 below November’s average.

The oil futures market
Crudes oil futures softened again in November, registering two consecutive months of losses on a monthly average basis. There was large day-to-day volatility in the upside and downside trading environment throughout the month. Economic concern continued to gain an upper hand, on worries about supply distribution due to the Middle Eastern geopolitical tensions. Some easing in geopolitical tensions helped cool the concern that had boosted prices in the middle of the month.

The Euro-zone economy experienced its worst quarter of negative growth since 2009. This, along with fears that the looming US fiscal cliff could plunge that country back into recession, limited the upside to oil market, despite the strong outlook for Chinese economic growth. Chinese economic data from official sources indicated that China would see a higher growth rate again in the fourth quarter. Crude imports were up considerably in October month-on-month (m-o-m), and industrial output, retail sales and fixed asset investments all climbed the previous month. However, earlier oil demand figures hinted that global economic worries were far from over, with prominent forecasting agencies all lowering their 2012 predictions. Also, US nationwide crude stocks climbed to their highest levels since July and last month saw another stockbuild in China after two consecutive months of implied stockdraws.

Month-on-month, the Intercontinental Exchange (ICE) Brent front-month price shed almost $2/b or around 1.75% to settle at $109.53/b, which was below the key $110/b level. Meanwhile, the New York Mercantile Exchange’s West Texas Intermediate (Nymex WTI) front-month price dropped by over 3%, amid bulging crude stocks — not least due to Hurricane Sandy making landfall, leaving behind a trail of devastation and shut-in refineries. Data from the North Dakota Industrial Commission showed that, in September, shale oil production from the state climbed to approximately 660,000 b/d, up by 4% m-o-m to yet another monthly record. Nymex WTI front-month dropped around $2.83 to average $86.73/b. The ICE Brent front-month year-to-date average was 0.7% higher at $111.93/b, compared with last year’s level of $111.18/b. WTI’s front-month year-to-date average price was almost unchanged from last year at $94.75/b.

Crude oil futures prices continued to slide in the first week of December. On 10 December, Nymex WTI and ICE Brent stood at $85.56/b and $107.33/b, respectively.

After the previous month’s steep fall, and consistent with the month-end improvement in crude oil prices, money managers increased their bullish bets for crude oil futures, adding more lots to their net length, according to the end-of-November Commitments of Trade data from Nymex and ICE. In the week to 27 November, speculators expanded their Nymex WTI and ICE Brent net long positions by 6,248 and 11,016 to 116,096 and 108,112 respectively.

Meanwhile, compared with the previous month, which had witnessed the biggest concentration of bearish positions in two years, money managers were generally bullish over the month, stirred by a temporary flare-up in geopolitical tensions, optimism about China’s economic growth and a timely solution for the US ‘fiscal cliff’. In total, speculators increased their combined net long positions in the two main crude oil futures markets, ICE and Nymex, by 9,883 to 224,208 contracts at the end of November from 214,325 lots at the end of October. Meanwhile, the combined open interest decreased by almost 400,000 contracts to 3.7 million. The Nymex WTI front-month futures contracts’ traded volume during November decreased by 73,365 lots to 5.16 million contracts. The ICE Brent volume also slipped, by a large 284,760 contracts to 4.97 million contracts.

The futures market structure
The Nymex WTI contango structure widened by another 10¢ in November, as high production in mid-continent, coupled with lower crude demand due to temporary refinery shutdowns associated with Hurricane Sandy, kept crude oil stocks at Cushing at high levels. As such, the WTI first-to-second-month differential widened from –45¢ in October to around –55¢ in November, on a monthly average basis. Hurricane Sandy forced shutdowns on the Atlantic coast, reducing East coast refinery runs to 760,000 b/d from more than 1 mb/d earlier. Meanwhile, increased domestic output, now at a 17-year peak, boosted stocks to their highest levels since June. The restart of the 220,000 b/d Buzzard field in the North Sea helped soften recent ICE Brent backwardation, where prompt prices were at a premium to forward supplies. But supply tightened again after the temporary shutdown of the Buzzard field and other production problems in the region, causing several cargos to be delayed. On top of these repeated outages, several arbitrage cargoes moved to South Korea, tightening the prompt volumes further. On average, the spread between the second and the first month of the ICE Brent contract remained unchanged at 95¢/b in November.

As North Sea crude oil production continued to experience a slow recovery from maintenance, in addition to the lingering effect of the geopolitical tensions on the Brent market, the transatlantic Brent-WTI spread widened further to record levels in November. The front-month ICE Brent/Nymex WTI spread widened to an average of nearly $23/b, a sustained discount not seen since October 2011. Abundant supply of US mid-continent crude, at a time when refinery runs were cut due to prolonged maintenance and Hurricane Sandy, depressed WTI prices relative to Brent, making the spread wider.

The light-sweet/heavy-sour crude spread
In Asia, the widened Tapis/Dubai spread witnessed earlier in November, amid increasing deterioration in fuel oil cracking margins, started to narrow late in the month. Renewed South Sudanese exports and slim Japanese utility demand depressed Asian sweet crudes. Sudan will export up to 60,000 b/d of medium-sweet Nile Blend crude from now on, up from 20,000 b/d earlier. The resumption of South Sudanese exports comes at a time of low demand from Japan’s power-generation sector. Japanese utilities favour Nile Blend because it is low in sulphur and waxy, making it suitable for direct burning. On the other hand, strong refinery demand from Japan and South Korea lifted Middle East Gulf crude values, further narrowing the spread. Refiners are looking to meet late-winter requirements, as well as replenish crude stocks. Medium-sour crude premiums to official selling prices rose to a 14-month high.

In the US Gulf Coast (USGC), the Light Louisiana Sweet (LLS)-Mars spread narrowed, supported by complex refinery demand for medium-sour crudes. Demand for mediumsour and heavy crudes increased in the US Gulf Coast as plants returned from maintenance. Refinery throughputs rose, narrowing sour crude differentials to increasingly over-supplied light-sweet grades. The LLS-Mars spread narrowed from $6.50 to $5.55 in November. In contrast, in the mid-continent, US medium-sour WTS’s discount to WTI fell sharply over the month as refinery maintenance, rising production and pipeline constraints to Cushing increased supply in West Texas, depressing prices. The differential widened to a record of more than minus $20/b. The depressed WTS market weighed on imported Latin American crudes that used WTS in their official formula pricing. In the US West Coast (USWC), demand for medium-sour Alaskan North Slope (ANS) picked up ahead of the expected restart of Chevron’s Richmond refinery, benefiting Ecuadorean sour grades.

Despite poor fuel oil margins in Europe, tighter supply caused the Urals differential to Dated Brent to narrow over the month. Urals supplies were getting tighter from pipeline maintenance and increasing demand from Russian refineries returning from maintenance. The increase in volumes that had been redirected to the Eastern Siberia Pacific Ocean (ESPO) pool was also tightening the Urals availability in Europe. In the meantime, despite support from disrupted West African supplies and higher demand in the Mediterranean for light-sweet crudes, North Sea grades were coming under pressure from falling demand for gasoline and naphtha, as well as lower arbitrage volumes to South Korea. On a monthly average basis, the Dated Brent-Urals spread narrowed from $1.35 in October to around 90¢ in November.