Crude Oil Price Movements - May 13

Source: OPEC_RP130503 5/12/2013, Location: Europe

OPEC Reference Basket
The OPEC Reference Basket (ORB) dipped by more than 5% for the second month in a row in April. However, it continued to average above $100/b, supported by the lesser decline in Oman/Dubai-related crudes. Cumulative losses in the value of the Basket in March and April amounted to more than $11 or 11% from the highest price this year, which was around $112/b in February. Similar to the previous month, the value of the Basket reflected the bearish sentiment in the international crude oil market, magnified by speculative activity, which continues to weaken outright prices by record levels. Several key factors continue to pressure crude oil prices, including weak economic data from the world's two largest oil consumers, the United States and China, which necessitated a cut in this year’s oil demand forecasts by major energy agencies. Additionally, ongoing Euro-zone economic turmoil and record levels of US crude oil inventories have contributed greatly to the downturn in crude oil prices.

On a monthly basis, the OPEC Reference Basket in April dropped to average $101.05/b, slipping by $5.39 or 5.06% over the previous month. Year-to-date, the Basket averaged $107.28/b, a decline of $10.22/b or 8.7% from the same period last year.

In April, all Basket component values weakened between 3.6% and 5.7% compared to the previous month. Apart from Bonny Light, which was supported by higher Asian demand amid lower availability, Dated Brent-related crudes faced downward pressure from the ample supply of regional light sweet crudes and lower refinery consumption. Saharan Blend, Es Sider, Girassol and Bonny Light dropped by 5.3% to an average of $103.55/b, down by $5.77. These grades continue to be affected by the overall sharp deterioration in the North Sea Brent market relative to US WTI and Middle Eastern Oman/Dubai.

With the return of Asian refinery demand after a substantial maintenance period, the Oman/Dubai market performed a bit better than other crude oil markets. This was reflected in the value of the Basket components priced in this market, since their values declined the least, despite record downward adjustments for official crude oil pricing formulae to Asia for March and April loadings. Qatar Marine and Murban crudes decreased by 3.6% or $3.90/b over the month of April to average $103.01/b. Multi-destination grades which also lost ground, include Iran Heavy, Basrah Light, Kuwait Export and Arab Light, which, on average, weakened by $5.61 or 5.3% to a penny short of $100/b, reaching $99.99/b for the first time in nine months. Reflecting the strong m-o-m drop due to formula differential adjustments for the US Gulf Coast (USGC) physical market, Latin American grades, including Ecuador’s Oriente and Venezuela’s Merey, decreased by $5.01 or 5% to a monthly average of $94.70/b, below $100 for the second month in a row.

On 9 May, the OPEC Reference Basket stood at $101.67/b.

The oil futures market
Crude oil futures saw a substantial drop again in April, with Brent falling 5.6% to July 2012 levels with a monthly average of around $103/b. Nymex WTI posted a much smaller loss of only 1% to average about $92/b.

A fragile global economy — with the prospect of weakening demand growth, rising production and high commercial crude stocks — has sent crude prices tumbling. Crude oil also lost ground amid cross-commodity and equity markets’ herd behaviour, as momentum trading led to a sell-off that sent commodity prices, such as those for gold and silver, plunging by record levels. The bearish market sentiment was due to lessthan- encouraging macroeconomic data from across the globe, particularly from the world's two largest oil consumers. China’s first-quarter GDP data was lower than expected, Europe’s economic outlook is somewhat gloomy again, while in the US jobs and economic data were disappointing. This led to a downward revision of global oil demand for 2013 by the three main forecasting agencies and a cut by the IMF to its forecast for global GDP growth in 2013, sparking bearish sentiment among investors. The market perception of oversupply on the back of the US shale boom amid lacklustre light sweet crude demand on both sides of the Atlantic Basin and high stocks, along with a record high in US commercial crude inventories, also had a hand in pushing prices lower.

On the Nymex, the WTI front-month moderately dropped by around 90¢, or 1%, to average $92.07/b in April. Compared to the same period in 2012, the WTI value is lower by $9.24 or 9% at $93.79/b. On the ICE exchange, the Brent front-month plunged by a hefty 5.6% or $6.12 to reach an average of $103.43/b. Year-to-date, ICE Brent also was lower by $8.55, or 7.2%, at $110.34/b from $118.89/b at the same period last year.

The latest CFTC and ICE commitments in trade reports for the week ending 23 April confirmed bearish investor sentiment for oil in April. Nymex WTI and ICE Brent managed money net length positions in futures and options posted a decline of 8.4% and 24%, respectively. Hedge funds and other financial players are continuing to exit long positions in oil futures as prices plunged during the past two months, with speculators cutting net length by some 132,000 lots or 132 mb in Nymex WTI and ICE Brent combined since prices hit a peak in mid-February 2013. The ICE Brent market is facing the bulk of the drop in net length, as it continues to slip at a much steeper rate than the Nymex WTI. Furthermore, open interest volume in ICE Brent dropped from its peak as prices fell, but recovered recently alongside a rise in overall traded volume to stand at 1.8 mn lots, 6,000 contracts lower than in mid-February. On the other hand, the Nymex WTI open interest volume increased over the period to 2.5 mn lots.

Total traded volume in both futures markets increased by almost 2.2 mn contracts each in April. However, the total traded volume in ICE Brent futures exceeded that of the Nymex WTI by more than 3.1 mn contracts to become the world’s most traded oil futures contract. The landlocked WTI contract has contributed to the attractiveness of Brent, which better reflects global fundamentals. The backwardated structure of Brent for more than two years has also played a role in attracting typically bullish investors, such as managed money groups, as it allows for additional profits during contract rollover. This is in contrast to WTI, where, with the exception of three weeks in October–November 2011, WTI 1st versus 2nd month has been in contango since 2008. WTI Nymex average daily volume during April reached 606,444 contracts (606 mb/d), up 80,744 lots, while the ICE Brent daily traded volume was at 756,658 contracts (756 mb/d) on average, 68,682 lots higher than the previous month. On 9 April, ICE Brent stood at $104.47/b and Nymex WTI at $96.39/b.

The futures market structure
The ICE Brent inter-month spread continued to weaken over April, flipping into contango for most of the month. Ample North Sea crude availability and high levels of regional maintenance have put the prompt Brent market under significant pressure in recent weeks. Volumes were partly lifted by prompt Forties availability on the back of strong production from the Buzzard field, which led to additional volumes being added to the April Forties loading schedule. In addition, the increased availability of Oseberg — up 29% m-o-m at 155,000 b/d — also helped offset a sharp drop of around 66,000 b/d in Ekofisk exports. The front-end contango in the ICE Brent curve was short lived, as the 1st and 2nd month spread returned to a very soft backwardation, aided by a flurry of arbitrage cargoes of North Sea crude to the USGC and South Korea. In April, the 1st and 2nd month ICE Brent contract spread averaged a multi-month low of around 9¢/b compared to 55¢/b the previous month.

On the other hand, the Nymex WTI market structure narrowed further over the month as incoming pipeline projects in the US as well as a massive increase in rail takeaway capacity further north alleviated supply pressure on the Cushing storage hub. The reversed Longhorn pipeline in West Texas seems to have helped in this regard, which is also evident from rising prices for West Texas Sour (WTS). The crude, produced in the Permian Basin, has seen its price climb from a differential of close to $19/b below WTI to a recent record of a 15¢ premium, as the crude can now directly reach end consumers in the US Gulf. In April, the 1st month versus 2nd month time spread came down to average around 30¢/b, compared to about 40¢/b in the previous month.

The Brent/WTI spread temporarily narrowed to below $10/b for the first time since January 2012, settling at $8.90/b on the last trading day of the month. The spread averaged $11.35/b in April, a hefty $5.25 less than the previous month. In relative terms, WTI strengthened, while Brent weakened on the factors mentioned above. The narrowing spread is weighing on US refining margins in the midcontinent and could potentially inflict pain on coastal refineries that had banked on railroad inflows of distressed midcontinent crude. The appreciation of WTI, following the pipeline-related easing of the bottleneck around the Cushing storage hub, has also boosted outright prices for other grades in the region, such as Bakken, WTS and Western Canadian Select (WCS).

Refiners in the midcontinent appear to be seeking refuge from increasing prices by undertaking maintenance. As of the week to 19 April, run rates in PADD II slumped to 83.4%, the lowest level since April 2010, and a clear indication that current margins are becoming less profitable. In the past, heavy maintenance at PADD II tended to widen the Brent/WTI spread, as stocks around the Cushing area built up. The latest round of maintenance has also resulted in stock builds at the Cushing hub, but the link is no longer as direct due to increases in outbound pipeline capacity in the Midland and Cushing regions (Longhorn, Permian Express and Seaway pipelines), as well as a massive increase in rail takeaway capacity further north. The key question will be at what point the narrower Brent/WTI spread closes off rail economics, thereby freezing outflows of Bakken crude and causing a renewed regional crude overflow.

Meanwhile, two other key factors supported US crudes, causing transatlantic arbitrage to temporarily open. Most importantly, Mexican and Venezuelan grades, which make up base load crude for a large portion of the USGC’s refiners, were comparatively more expensive than competing US crudes. Counter to historical trends, Latin American term volumes have been more expensive than US crudes. The high prices result from the formulas utilised (which incorporate WTI and WTS) to price Latin American term volumes. Accordingly, this strength has rubbed off on the domestic crude complex.

The light-sweet/heavy-sour crude spread
The global light-sweet/heavy-sour spread narrowed significantly, except in the USGC. The spread followed developments in the refined product markets, where the healthy fuel oil market supported heavier crude grades, while poor light distillate cracks depressed light sweet crudes. Lower availability of sour crudes relative to the ample supply of lighter crudes also supported the narrowing trend.

In Europe, the sour crude market reflected bullish fundamentals, with Urals trading at 2013 highs both in the Mediterranean and in Northwestern Europe, as refining margins improved and the market saw limited supplies of alternative grades. Support came from strong fuel oil cracks, a tight May loading schedule, limited availability of alternative crudes, the continued unreliability of Kirkuk crude and the return of an estimated 1.4 mb/d of European refining capacity from maintenance in May, compared to April. Fuel oil is finding support in arbitrage to Asia, while the continuing loss of rival grades is keeping the sour crude market tight in the region.

On the other hand, light sweet North Sea crude came under pressure from poor refining margins and slim demand amid ample prompt cargoes and lower arbitrage trade to Korea. Weak naphtha refining margins also weighed on demand for sweet crudes. A steep drop in North Sea Dated has pushed Oseberg to a discount to US Light Louisiana Sweet (LLS), opening the arbitrage for North Sea grades to move to North America. Naphtha has come under pressure from weak demand in Europe for gasoline production and petrochemical feedstock. The Urals differentials moved from more than minus $1.30/b to Dated Brent in March, to only minus 10¢ in April, on a month-to-month average basis, the lowest since January 2010.

Similarly, in Asia, strong fuel oil cracks coupled with weak middle distillates contributed to a further sharp collapse in the Tapis/Dubai spread in April. Fuel oil refining margins are at their strongest since July last year, while inventories in Singapore recovered from a 32-week low. Fuel oil supplies are also tight, as Mideast Gulf refineries enter turnaround season. Meanwhile, both light and middle distillate cracks have trended downward, coming under pressure from lacklustre demand in the region as well as an upward movement in Chinese diesel exports. The depressed market for middle distillates is also reflected in falling spot differentials for diesel and kerosene-rich crudes such as Murban and ESPO. Besides maintenance, the Asian crude market — particularly light grades — is coming under pressure from higher inflows of West African, Caspian and other Brent-related grades following a narrow Brent/Dubai cash spread that averaged around 50¢/b in April. The influx in crude coupled with a still uncertain demand outlook and ailing refining margins has hit the Dubai market structure hard, narrowing its backwardation. Tapis monthly average premium to Dubai in April weakened further to $6.85/b, compared to a premium of about $9.35/b in February, a decrease of $2.50.

In the USGC, the sweet sour spread for LLS vs. Mars widened slightly by almost 60¢ to an average of $5.05/b in April. On the other hand, in Midland Texas, light sour WTS crude is trading at parity to WTI, up from a differential of $15/b just a few weeks ago, thus diminishing the attractiveness of South American crudes. Both Pemex and PDVSA use WTS in their pricing formula, therefore the closing spread between WTS and WTI indirectly affects their crudes. WTS has also tracked WTI’s narrowing differential to Brent.

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