OPEC Reference Basket
The petroleum market began on a bullish note in July due to the prospect of healthy demand. The Basket continued to rally in the first week of the month ignited by healthy gasoline demand in the USA. The Basket surged 3.5% or $2.3 to average $68.31/b for the week. The sentiment softened early in the second week as the outlook for Chinese demand was less than anticipated amid positive geopolitical developments in the Mideast. Nevertheless, volatility was supported by revived concern over Mideast talks and tight North Sea supply in August.
The second weekly average rose $1 or 1.5% to settle at $69.35/b with the Basket peaking at an all-time record of $71.71 on 14 July. The sentiment was furthered with the onset of the crisis in the Middle East, although market concerns were short-lived as it quickly became evident that Mideast supplies would not be disrupted. Furthermore, the wide sweet/sour spread pressured Mideast crude, while continued tight August supply from the North Sea added bullishness to the market. Hence, the Basket was nearly unchanged as the third weekly average gained only 10¢.
In the final week of the month, while most Asian buyers had fulfilled their requirements and the sweet/sour spread continued to widen, downward pressure was exerted on Mideast crudes. Nevertheless, the ongoing crisis in the Middle East and healthy demand for gasoline in the west maintained some market bullishness. The month closed with news of further disruptions to West African supplies, a leakage at Russia’s Druzhba pipeline, tight North Sea supply in August and sizzling summer electricity demand that resulted in natural gas prices pushing the petroleum complex upward.
The monthly average of the Basket rose nearly 7% to settle $4.32 higher at $68.92/b. Concern about the ongoing Middle Eastern geopolitical tensions amid healthy gasoline demand in the USA supported market bullishness. This sentiment was furthered to some extent by the turmoil among Mideast nations, although no effect on oil supply was foreseen. In the first two weeks of August, the Basket surged to a new record-high, peaking at $72.64/b to average $71.75/b, amid supply disruptions in the US largest oil field in Alaska, which cut 400,000 b/d of medium crude flow due to a pipeline leakage. However, the return of half of Prudhoe Bay production and the improving geopolitical situation allowed prices to ease downward to $69.01/b on 15 August.
The domestic crude market in the USA emerged on a stronger note due to demand for gasoline amid high prices. The sweet/sour spread narrowed on stronger refinery appetite for light grades to produce gasoline. The WTI/WTS first weekly average spread was 16¢ narrower at $4.16/b. The continued widened contango also inspired buying interest into the second week, as the sweet/sour spread fell to the lowest level in two months to stand at $3.83/b. The steepened contango also inspired the procurement of light grades, hence, the WTI/WTS spread narrowed to a three-month low of $3.25/b in the third week.
Nevertheless, the narrower contango on the emerging new Nymex futures frontmonth halted buying interest; thus, the WTI/WTS weekly average spread was 23¢ wider at $4.06/b, as the spread peaked at a four-week high of $5.76/b. Concern over gasoline supply amid more stringent specifications pushed the sweet/sour spread to $7/b, the widest since early March. Tightening West African crude supply continued to pressure the marketplace.
However, the sentiment was short-lived as demand for light crude continued. In the final week, the average WTI/WTS spread widened by a significant $1.20 to $5.26/b as refiners continued to buy. The monthly average for WTI was $74.33/b for a rally of $3.45 or nearly 5%. The WTI premium to WTS was $4.30/b or $1.27 narrower.
North Sea market
The oil market for the North Sea crude emerged on a weaker note as a major seller offered Brent at a much lower price while buyers waited for prices to fall on poor margins and weakening refinery interest for late July barrels amid a narrowing sweet/sour spread. In the second week, the continuing pressure on unsold July cargoes prompted the market to weaken further, although it gained some strength from a 192,000 b/d drop in August BFO output. The sweet/sour spread narrowed amid demand for alternative and lucrative regional crudes. Nevertheless, the record-low supply of benchmark crude alerted the market for gasoline-rich crude in the third week. North Sea differentials firmed on continued demand for summer fuels amid tight August supply and prompt demand. The bullish market sentiment recovered amid the prospect of poor supply recovery from Nigeria. Brent’s monthly average was $73.66/b for a gain of $4.97 or more than 7% over June.
Urals firmed in early July amid a lower amount of Kirkuk crude on offer. However, the sentiment was short-lived as refining margins weakened at a time when Iraq was offering more barrels from its northern outlet. The Brent/Urals average spread widened in the first week to $4.63/b compared to $5.13/b in the previous week amid interrupted Kirkuk supply due to logistical reasons. In the second week of the month, differentials firmed due to emerged demand amid the prospect of tight supply of North Sea crude. The Brent/Urals average weekly spread narrowed by 90¢ to $3.73/b. Nevertheless, the weak fuel crack spread amid summer demand for light-end crude oil weakened differentials by 59¢ to $4.32/b in the third week. The bearish sentiment was furthered in the fourth week on continued demand for lighter grades which widened the Urals spread to Brent by another 64¢ to $4.96/b. The Urals monthly average was nearly $4.70 or over 7% higher to settle at $69.21/b with the discount to Brent expanding by 27¢ to $4.45/b.
Middle Eastern market
Mideast crude emerged on a weaker note amid poor fuel oil margins while the market digested the new retroactive Oman OSP. Furthermore, ample supply of sour crude in the region and the delayed start-up of an Omani refinery were seen as forcing the producer to offer more September barrels. Arbitrage barrels from Russia continued to exert downward pressure on the market as well amid the Brent/Dubai weekly average spread narrowing by $1.14 to $4.45/b. September Oman was assessed between a 1¢ discount and a 1¢/b premium to MOG. In contrast, Abu Dhabi crude was trading at a strong premium of 20¢/b to OSP. In the second week, the average Brent/Dubai spread narrowed to $4.42/b supporting India’s move to procure Russia’s Urals crude. Abu Dhabi crude was valued at a strong premium amid healthy refining margins with September Murban assessed at a 35¢/b premium to OSP. In the third week, the improved fuel oil crack spread supported Oman to trade at a 5-6¢/b premium to MOG, with Abu Dhabi distillate-rich crude Murban steady at a 38-30¢/b premium to OSP. In the final week, with refiners having fulfilled their procurements and as Taiwan cancelled its September buy-tender of Mideast crude, bearishness prevailed in the marketplace amid a shift to October barrels. September Oman was trading at parity with Abu Dhabi Murban at a 10¢/b premium to the MOG. The prospect of slow Chinese demand and comfortable crude oil stocks in Singapore helped to calm market sentiment for the Mideast crude in Asia. The monthly average Brent/Dubai spread was almost $1 wider at $4.46/b.
Asia-Pacific's crude market emerged on weaker note with several cargoes of naphtha-rich crude and condensate available for August, while heavy sweet regional grades were pressured by Nile Blend. However, the narrowing Tapis/Brent spread limited the potential arbitrage to flow eastward in the first week. The bearish sentiment was furthered in the second week amid unsold July stems and lingering August barrels. Furthermore, heavy sweet crude Duri on prompt offer pushed the grade to a value of below 50-60¢/b to ICP, the lowest level in a year and a half, amid Japanese utilities remaining on the sideline. The poor fuel oil crack spread added to the downward pressure on heavy crude. In the third week, the market was firmer on the back of strong naphtha prices, with condensates trading at the strongest premiums in more than two years. Moreover, maintenance on the Cossack oilfield lent support to regional crude. The Tapis/Brent weekly average widened to over $6/b, providing support for the inflow of western crude. In the fourth week, a fresh supply disruption from Nigeria added to the market bullishness. September Tapis was assessed to sell at a premium of almost $1.50/b to the APPI, higher than sales in the previous month at a $1/b premium. The narrowing Tapis/Brent spread later in the month added to the bullishness for the regional light sweet crude. In contrast, heavy sweet grades remained under pressure due to weak Japanese demand for direct fuel burning by thermal plants amid ample supply in the region and a weak naphtha market. September Duri was valued lower at 30-40¢/b below ICP. The monthly Tapis/Brent spread was 7¢ wider at $4.50/b, keeping the flow of rival western grades tight.