Crude Oil Price Movements - Oct 13

Source: OPEC_RP131003 10/10/2013, Location: Europe

OPEC Reference Basket
For the fourth consecutive month, the monthly average value of the OPEC Reference Basket (ORB) was higher in September, tracking the global oil market complex amid a continuation of supply tightness, geopolitical tensions and intense speculative activities during the first half of the month. Although the second half of the month witnessed a deflation in oil prices as the geopolitical strains and supply worries started to subside, on average, the Basket rose to levels seen earlier in the year, maintaining a value above $105/b throughout the month. Meanwhile, as the third quarter came to a close by the end of September, the Basket recovered from the hefty downturn in the previous quarter, to settle more than $5 above its value in 2Q13, which had recorded the weakest Basket quarterly value in more than two years. In addition to geopolitical tensions and supply disruptions, the improvement in the global economy and increasing managed money activities as a result of monetary stimulus programmes, particularly by the US Federal Reserve, played a big role in supporting crude oil outright prices in the third quarter.

The value of the Basket improved by $1.21, accumulating gains totaling around $8.10 in four months, to a monthly average of $108.73/b in September, the highest level since February. On a quarterly basis, the value of the Basket in the third quarter averaged close to $107/b, almost $6 above the second quarter. However, compared to the same period last year, the Basket year-to-date (y-t-d) value continues to trail by almost $4.50 to stand at $105.69/b. The Basket y-t-d value this time last year was at $110.18/b.

The Middle Eastern and multi-destination ORB components showed a significant improvement over the month, particularly during the first half, as the market for sour crude shot through the roof with Dubai revealing the strongest backwardated market structure in over 12 years. This was due to the Libyan crisis as this has propped up the Brent complex resulting in a very wide Brent/Dubai spread, which in turn has crimped arbitrage opportunities of Brent-related crude into Asia and kept buying interest for Dubai-related grades enthusiastic. This bullish market sentiment was also associated with Chinese buying for restocking and Northern Asia winter stock building. The Middle Eastern grades, Qatar Marine and Murban crudes increased by an average of $1.72 over the month, while multi-destination grades Iran Heavy, Basrah light, Kuwait Export and Arab Light strengthened on average by around $1.40. Similar to the previous month, the light sweet components of the ORB continued to be supported by production outages in Libya, but to a much lower extent. Although Libya now appears to be producing significant volumes following the lifting of force majeure on the ports of Mellitah and Zawiya during the second half, the outage in Libyan crude production continued to affect the market more in terms of higher physical spot premiums for lighter grades and steeper backwardation on the Brent curve. On average, the prices of Brent-related components of the Basket from North and West Africa, Saharan Blend, Bonny Light, Girassol and Es Sider edged up by 90¢. Ecuador’s Oriente, which slipped the previous month, gained over $2.20 in September, while Venezuela’s Merey crude edged down slightly by 20¢.

On 9 October, the OPEC Reference Basket stood at $106.94/b, a decrease of $1.79 compared to the September average.

The oil futures market
Crude oil futures started the month with an upbeat momentum fuelled by tighter global supplies and fears of oil supply disruptions in the broader Middle East. The disruption in Libya's oil exports squeezed supply as unrest shrank the country’s exports to around 100,000 b/d, less than a tenth of capacity. This exacerbated an already tight market given reduced volumes from the MENA region, West Africa and South Sudan, as well as disappointing growth from Iraq and Brazil. This has led speculative traders to hike bullish bets on crude oil prices, taking them to record levels. Positive demand growth and economic data from the US and China also supported prices.

Subsequently, oil prices on both sides of the Atlantic began to drop steadily, as geopolitical tensions faded. A rebound in supplies from Libya, Iraq and South Sudan and an assurance by major suppliers and international oil agencies that the market is well-supplied also dampened the pressure on crude oil prices. Libya's production recovered following an agreement to reopen major western fields, while South Sudan production reached 240,000 b/d, its highest volume since oil production was shut down in January 2012. Oil prices also declined in the second half of September amid easing geopolitical tensions which boosted the supply outlook and cut further into the risk premium in the market.

On the Nymex, the WTI front month ended the month 30¢ lower at an average of $106.24/b but remained above the $105 mark for the second month. Compared to the same period in last year, the WTI value is higher by $1.93 or 2% at $98.14/b. This is the second month in a row the y-t-d value of the Nymex WTI front-month is higher this year compared to the all-time high year of 2012.

On the ICE exchange, the Brent front-month improved slightly by 81¢ to an average of $111.25/b, maintaining its value above the $110/b mark again. On the other hand, the ICE Brent front-month year-to-date value dropped $3.64 or 3.2% to $108.57/b from $112.21/b in 2012.

On 9 October, ICE Brent stood at $109.06/b and Nymex WTI at $101.61/b.

As the rally in future crude oil prices came to end, money managers cut their accumulated record net length positions sharply at the end of September. Over the month, Nymex WTI and ICE Brent front-month prices plunged about $5.80 each. Net length dropped, and overall exposures were reduced. Money managers lowered their net length holdings in Nymex WTI contracts by 42,424 lots to 275,098 lots, while reducing their overall exposure by 58,010 contracts to 329,794 contracts. In ICE Brent futures, investors dropped net length even more by 64,217 lots to 167,745 lots. Their exposure was also down by 39,193 lots to 285,769 lots. Meanwhile, the combined reduction in open interest for the two futures contracts during this period was 126,912 contracts to 4.45 mn lots from the 4.58 million held at the end of the previous month.

ICE Brent futures daily traded volume increased by 18,814 contracts to 641,290, while Nymex WTI volume dropped again by 27,133 to 556,895 lots. The daily aggregate traded volume in both crude oil futures markets decreased by almost 8,319 contracts in September to over 1.2 mn future contracts, equivalent to 1.2 bn b/d, more than ten times the world daily oil demand. The total traded volume in Nymex WTI and ICE Brent contracts in September was 11.34 and 13.47 mn contracts, respectively.

The futures market structure
The backwardation between first- and second-month ICE Brent crude futures has softened over the month as supply tightness and distribution threats eased. After around 3 mb/d of oil supply losses in the market last month, significant volumes started to come back during September. The most important of these developments was the partial return of Libyan crudes, estimated at around 600 tb/d, and the end of seasonal field maintenance in the North Sea. South Sudanese production is also back at 240 tb/d.

A leaking pipeline in Iraq has been fixed, and production from the Majnoon field is expected to reach 175 tb/d. The super-giant Caspian Kashagan field has finally been brought on stream and could be producing 75 tb/d by October. The latest Bakken output figures show that production surged by almost 55 tb/d. With more direct exposure to events in Middle East, prompt Brent prices, relative to forward prices, also dropped as geopolitical tensions diminished over the month. In September, the spread between the second and the first month of the ICE Brent contract averaged around $1/b, easing close to 25¢ from the previous month’s record steep level.

In the US, Nymex WTI backwardation remained almost unchanged for the third month in a row as stocks continued to be drawn from Cushing with more and more pipelines and rail takeaway capacity becoming available. Crude oil stocks in Cushing, Oklahoma, the delivery point for the US oil futures contract, fell for twelve consecutive weeks, but the pace of the drawdown slowed by the end of the month. Stocks at Cushing in the week to 27 September slipped to 32.8 mb, bringing the total fall since the end of June to 16.9 mb. Cushing has shed over a third of its crude stocks since the end of June as pipeline bottlenecks were cleared, allowing oil to move to refineries in the US Gulf Coast and the Midwest regions. The first month versus second month time spread remained at an average of around 50¢/b.

After reaching levels of close to $8/b earlier in September, the Brent-WTI differential has narrowed back to close to $5/b as supply in the Brent market and geopolitical tension eased. It is interesting to note that the current level of the spread is close to the import parity level, which is defined by the cost of moving crude from Cushing to the US Gulf Coast. Due to the effective de-bottlenecking, the Brent-WTI can now be seen as a relatively good measure for geopolitical risk premiums. The recent collapse in the spread would indicate that market participants have largely removed the premiums that came on the back of the spike in geopolitical tensions at the end of August.

The light-sweet/heavy-sour crude spread
In September, global sweet/sour and light/heavy differentials narrowed, except in Europe, driven mainly by regional supply demand fundamentals. In Europe, the Brent/Urals spread - or light/heavy spread - widened further, with Urals trading at a discount of close to $1/b, doubling the previous month’s discount.

Differentials for Russian medium sour Urals cargoes in the Mediterranean fell to a steeper discount to North Sea Dated, as supplies continue to rise just as the combination of weak refining margins and regional maintenance has weighed on demand. Weak refining margins continued to keep buying interest in the Mediterranean sluggish, despite limited sour supply in the Mediterranean amid ongoing delays of Iraq’s Kirkuk. Persistently high flat prices and strong backwardation in the Brent complex weighed on refining margins. Refining margins have also come under additional pressure from weak product cracks despite the recent slide in crude differentials and weakening backwardation. Furthermore, ongoing refinery maintenance in Russia has kept the Urals supply volume high.

In Asia, the light sweet and heavy sour spread, represented by Tapis/Dubai narrowed as Asian buying interest turned to regional crudes amid tightly shut arbitrage flows to the region for most of September. The Libyan crude production outages caused the Brent/Dubai spread to widen significantly, curtailing arbitrage opportunities of Brentrelated crude into Asia. This kept buying interest for Dubai-related grades very strong as Asian refiners snapped up Dubai-linked grades, shunning more expensive oil priced on Brent. Middle Eastern sours were also supported by high demand from Japan and South Korea for light sour crudes for stock building ahead of winter. Exports of these grades were also expected to fall due to planned maintenance. The strength of Dubairelated crudes impacted refiners negatively with cracking margins seen in negative territory. In September, on a monthly average basis, the Tapis/Dubai spread narrowed to $9.70 from $10.50 during the previous month.

Both US Gulf Coast sweet and sour crude oil benchmarks, LLS and Mars, respectively, weakened relative to WTI and Brent in September as autumn refinery maintenance began across the US Gulf Coast. Nevertheless, the light sweet/heavy sour spread or the LLS/Mars spread narrowed over the month. The light sweet LLS lost ground to medium sour Mars crude as pipeline reversals steadily cleared the Cushing clot, shifting some of the light sweet supply in the area to the US Gulf Coast. Heavier crudes are also benefiting from the refiners’ need to blend down abundant US supplies of lighter grades. The shift from summer’s gasoline-led demand to winter’s focus on middle distillates also tilted refiners’ crude requirements to medium sour crudes. The LLS/Mars spread narrowed further by almost 90¢ to $4.50/b to the advantage of Mars, on average.


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