The OPEC Reference Basket (ORB) edged up by around 70¢ to settle slightly
above $105/b in February as cold weather, production cuts and geopolitical
factors helped to push many oil markets higher. Crude oil futures on both sides
of the Atlantic made strong gains over the month, particularly Nymex WTI,
supported by the depletion of crude stocks at Cushing, Oklahoma, and severe
winter weather in the US.
The Nymex WTI front-month gained a hefty $5.82, to average $100.68/b in
February, the highest since October 2013. ICE Brent futures rose $1.72 to
$108.84/b. Data from the US CFTC showed that speculators raised net long
US crude futures and options positions to the highest level on record during
February, accompanying a surge in the WTI price.
The stronger gains for WTI squeezed the transatlantic spread to a fresh
five-month low. This came as the startup of the 700 tb/d southern leg of the
Keystone XL pipeline reduced crude stocks at the Nymex delivery hub of
Cushing, Oklahoma, lending upside support to WTI, while Brent remained
subdued. The Brent-WTI spread narrowed by $4.10 to an average of $8.16/b in
February, from $12.26/b in January.
OPEC Reference Basket
The ORB rebounded in February, inching above $105/b as cold weather, supply
disruptions, and geopolitical tensions helped to push many oil markets higher. Atlantic
Basin Brent crude rose as Libyan supply was disrupted and North Sea production
became tighter, while strong Chinese demand and reduced production of competing
grades pushed Dubai crude higher. Nymex WTI also strengthened, buoyed by
increased pipeline capacity to move crude from Cushing, Oklahoma, to the US Gulf
Medium and heavy sour crude output fell in most regions, supporting prices.
Latin American sour grades made gains as severe weather delayed loading in
Colombia and Mexico. Reduced March loading programmes for Middle East crude
buoyed Dubai-related crude prices, particularly Basrah Light and Qatar Marine.
Sweet middle distillate-rich crude prices also rose as production fell in the Atlantic
Basin. Heating oil demand and Asia-Pacific buying interest propped up prices further
for middle distillate-rich grades, such as those in Nigeria.
Reduced Libyan supply also supported regional light sweet crudes. Production fell by
more than 200 tb/d after the close of a pipeline from the El Sharara field. Meanwhile,
weather has been an important factor in oil price movements so far this year.
On a monthly basis, the ORB averaged $105.38/b in February, an increase of 67¢ or
0.6% over the previous month. On a year-to-date basis, the Basket was lower
compared to the same period last year, settling at $105.03/b in February compared to
$110.93/b in the same month last year.
All Basket component values improved in February, particularly Ecuador’s Oriente,
which gained over 4%. Latin American Basket components, Venezuela’s Merey and
Oriente, were generally supported by WTI market gains and tight supplies due to
loading delays caused by severe weather in Colombia and Mexico. The WTI’s general
movement during February was in line with expectations that a drawdown of Cushing
stocks would follow the startup of the 700 tb/d southern leg of the Keystone XL pipeline
at the end of January. Inventory levels at the hub sank to the lowest level since the
beginning of October. This has contributed to a $4 or 4.3% gain in Oriente value over
the month of February. Venezuela’s Merey edged up slightly by around 30¢ or less
than 1% compared to the previous month.
The Brent-related Basket component prices rose as production from Libya and the
North Sea slipped. Atlantic Basin seasonal heating oil demand and Asia-Pacific buying
interest also underpinned some of the middle distillate-rich crudes such as the Nigerian
grades. Most of the other regional sweet crudes, including those from Algeria and
Angola, were also supported by the renewed Libyan outages. Libya's oil production fell
to above 300 tb/d due to a halt in production at the El Sharara field. Brent-related
crudes, Saharan Blend, Es Sider, Girassol and Bonny Light increased by 82¢ on
Meanwhile, reduced March loading programmes for some Middle East grades such as
Iraq’s Basrah Light and Qatar’s Al Shaheen maintained their prices. Nevertheless, the
Asian crude market remained pressured by fairly depressed prompt buying interest.
This falls in line with the start of the maintenance season in the Asia-Pacific region
combined with the Brent/Dubai spread narrowing to levels below $4/b, thereby enabling
a steady inflow of arbitrage crudes into the region. Middle Eastern spot components
and multi-destination grades improved slightly by around $1 and 40¢, respectively.
On 11 March, the ORB stood to $104.38/b, $1 below the February average.
The oil futures market
Crude oil futures on both sides of the Atlantic made strong gains over the month of
February, particularly US crude oil futures. Nymex WTI firmed significantly, supported
by the depletion of crude stocks at Cushing, Oklahoma, the pricing hub for the
North American marker crude, following the startup of TransCanada's 700 tb/d USGC
pipeline in late January. Almost 300 tb/d of crude oil has been flowing from Cushing to
the US Gulf Coast (USGS), helping inventories at the WTI pricing point to decline to the
lowest level since the beginning of October of last year. The US was also hammered by
frigid temperatures in February, continuing a winter-long trend that has boosted heating
oil and propane consumption. The expectation for tight diesel and heating oil supplies
sent prices soaring as persistently cold weather across the US reduced heating fuel
stocks. Spiking natural gas prices in the US Northeast also prompted utilities to turn to
fuel oil for electricity generation in the region. Furthermore, US crude oil rose earlier in
the month, following a rally in the equity markets, triggered by the US unemployment
rate falling to a five-year low.
Meanwhile, geopolitical events in the Ukraine as well as ongoing tensions in other
regions supported crude prices in general, and ICE Brent in particular. ICE Brent drew
support over the month from continued unrest in Libya and South Sudan. South
Sudan's oil production has fallen to about a third of its capacity at 170 tb/d. Oil also
found support from Chinese data showing that in January, banks disbursed the highest
number of loans of any month in four years. This surge suggests that China’s economy
may not be losing as much momentum as some have feared. Brent also gained as
EU economic growth data strengthened, boosting the euro against the US dollar. Brent
market sentiment was also bullish on a stronger 2014 oil demand forecasts and
Chinese data showing oil imports reached record highs.
The Nymex WTI front-month gained $5.82 to average $100.68/b in February, its
highest level since October. Compared to the same year-to-date period in 2013, the
WTI value is higher by $2.56 or 2.7% at $97.62/b. On the ICE exchange, the Brent
front month improved by $1.72 to average $108.84/b. ICE Brent was lower in value
year-to-date compared to the same period last year, weakening by $6.18 or 5.4% to
$107.93/b from $114.11/b.
On 11 March, ICE Brent stood at $108.55/b and Nymex WTI at $100.03/b.
Data from the CFTC showed that speculators raised net long US crude futures and
options positions to the highest on record during February, accompanying a surge in
the WTI price. The speculator group raised its combined futures and options positions
in US crude oil contracts by 78,770 lots to 339,052 contracts over the month. This is
equivalent to 80 mb, or roughly $8 billion, over the month, one of the most rapid runups
in bullish bets since 2011. The run-up came as oil prices extended a month-long
rally to above the $100/b level.
Meanwhile, speculative net-length for ICE Brent rose to the highest level for 2014 in
February and was last seen to close at 140,000 contracts. Hedge funds and other large
investors raised their bets on higher Brent crude oil prices for the last two weeks in
February, data from the ICE showed, rebounding further from the lowest level in a year
seen in early February. The money manager group increased its net long positions
over the month by 41,650 contracts to 139,921 lots. Total futures and options open
interest volume in the two markets increased in February by 85,821 contracts to
4.0 million contracts.
The daily average traded volume during February for Nymex WTI contracts decreased
by 12,404 lots to average 519,010 contracts. ICE Brent volume also moved lower by
58,916 lots to 533,442 contracts. The daily aggregate traded volume in both crude oil
futures markets decreased by 71,320 lots in February to around 1.05 million contracts,
equivalent to 1.05 billion b/d. The total traded volume in Nymex WTI and ICE Brent
contracts in February was 9.86 million and 10.67 million contracts, respectively.
The futures market structure
The depletion of crude stocks at the WTI delivery hub pushed the Nymex WTI frontmonth
contract up higher relative to future months’ contracts. The Cushing stock draws
came in at a combined 6 mb over the first three weeks since the startup of the
Keystone southern leg. High demand and cold weather also drove the prompt-month
contract value higher compared to forward ones. As a result, the prompt-month
Nymex WTI futures contract saw its premium vs. the second month contract move from
around 5¢/b to 55¢/b. Meanwhile, on a related matter, as money managers positioned
themselves on the long side, the forward curve of WTI became steeper. Compared to mid-December, the liquid front-month contracts have gained about $10 whereas the
back end of the curve has moved only marginally. This back end anchoring could turn
out badly for US shale producers who struggle to hedge their production forward.
The backwardation in the Brent market structure remained elevated over the first half of
February, buoyed by brief Buzzard production outages coupled with the ongoing
disruption in Libyan exports and strong Asian demand for Forties crude, the typical
price-setter of Dated Brent. Over 50% of available cargoes headed to South Korea and
China. However, this supportive factor faded mid-month onward as buying interest
among Asian players slackened as they moved closer to turnarounds and higher
maintenance was seen in Europe. The backwardation in Dated Brent slumped from
almost $3/b in late January to less than 80¢/b towards the end of February. The spread
between the second and the first month of the ICE Brent contract averaged around
45¢/b in February compared to 60¢/b in the previous month.
The stronger gains for WTI have continued to squeeze the transatlantic spread with the
front-month Brent-WTI spread averaging at a new fresh five-month low as steady
drawdowns in crude stocks at the Cushing, Oklahoma, delivery hub have lent upside
support to WTI, while Brent remains subdued. Many traders and analysts expect the
spread to continue to narrow as TransCanada's southern Gulf pipeline ramps up
capacity and transports more and more oil from the inland storage hub to coastal
refineries. The spread between ICE Brent and Nymex WTI narrowed by a hefty $4.10/b
to settle at an average of $8.15/b in February, from $12.25/b in January.
The light sweet/medium sour crude spread
Global sweet/sour differentials were mixed over the month, slightly narrowing in Europe
and barely widening in the USGC, while remaining almost unchanged in Asia.
The Asian crude market has remained pressured by fairly depressed prompt buying
interest. This falls in line with the start of the maintenance season in the Asia-Pacific
combined with the narrowing Brent/Dubai spread. Due perhaps in part to these factors,
key sour crude differentials saw little support over the month. Meanwhile, values for
regional sweet crudes – naphtha-rich grades – took a tumble amid a relatively
unsupportive Singapore naphtha crack, regional maintenance and considerable
arbitrage inflows from West of Suez. The overall feedstock picture looks bearish as
some 1.8 mb/d of crude distillation unit (CDU) capacity is coming offline for
maintenance in April and another 2.1 mb/d is scheduled in May. In February, the
Tapis-Dubai spread narrowed to average $8.65/b, compared to $8.70/b in the previous
month, a minor drop of 5¢.
In Europe, Urals managed to reduce its differential to Dated Brent on average amid
supportive market developments late in the month. Urals prices firmed during the
second half of the month despite the approaching refinery maintenance season,
supported by a shorter-than-expected loading programme and stronger refining
margins. Earlier in the month, the strength seen in Urals differentials over the latter half
of January that stemmed from the initial news of shorter February loadings rapidly
evaporated as spring maintenance took hold of regional buying interest with at least
670 tb/d of CDU capacity going offline over the month. On average, the Dated
Brent/Urals spread in February narrowed by 42¢ to $1.44/b.
In the US, the LLS/Mars spread widened slightly as both moved in tandem during
February, albeit at a very narrow level. This is considering that the light grade is coming
under pressure from higher inflows of sweet crude into the USGC via the Seaway and
Keystone XL pipelines, the latter of which came into operation on 22 January.
Meanwhile, some pressure on the sour side came from higher production of Mars
following the startup of Shell’s Mars B Olympus platform in early February. Meanwhile,
hefty maintenance work for February to the tune of 2.3 mb/d did not have much impact
on differentials. The premium of LLS over Mars averaged $3.35 in February compared
to $3.20 in January.