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The Oil Futures Market - October 06

Source: OPEC_RP061007 10/16/2006, Location: Europe

The downtrend for the Nymex WTI crude oil futures contracts continued into September from the previousmonth. With the Labor Day signaling the end of the driving season and no further developmentsin the Mideast geopolitical arena, bearish US petroleum stock data triggered speculators to liquidatelong positions, while the perception of a further downward trend enhanced the build in shorts. Thefront month closed the first weekly period down 1.5% lower at $68.60/b. Thus, the CFTC report for the firstweekly period exhibited a further drop of 13,500 contracts in non-commercial net long positions amid a healthy build of nearly 13,000 lots in short positions. Moreover, open interest saw a build of 20,600 lots to stand at 1,170,300.

In the second weekly period, the bearish sentiment was furthered by the possible resumption offull output from BP's Prudhoe field by the end of October. News that Royal Dutch Shell's Marsplatform in the Gulf of Mexico was producing more oil than it had before Hurricane Katrina hitlast year as well as the partial return of Nigeria crude helped accelerate the downward trend.Furthermore, distillate stocks were healthy amid the prospect of weakening demand as estimatedby the IEA amid steady OPEC output. The Nymex WTI prompt month closed the second weeklyperiod down $4.84/b or over 7% at $63.76/b. The CFTC reported that non-commercials furtherincreased their short positions by a healthy 8,300 lots while moderately reducing their longs.Hence, net longs were down by a considerable 10,300 lots to some 37,000 contracts. Openinterest saw another significant build, rising by nearly 44,000 lots to peak at a new record of1,214,000 contracts.

In the third weekly period, market condition enhanced the retreat on funds sell-offs for profittaking,with the Nymex WTI front month futures contract losing $2.10/b or 3.3% to close theperiod at $61.66/b. The CFTC reported a significant liquidation in long positions which dropped15,500 lots to the lowest level since the third week of June, with the net longs down14,500 contracts to 22,500 lots. Moreover, open interest dropped by a healthy 36,500 contracts to1,177,400 lots.

The downward trend continued into the final weekly period of the month with the new Nymex WTI front month slipping 65¢ or 1% to settle at $61.01/b. A healthy distillate stock-build amid concern over slower demand growth and receding fear about this year’s Atlantic hurricane season contributed to thesustained downward trend of crude oil prices which thus far have dropped 20% since mid-July. However, the perception of a possible OPEC supply cut prevented prices from tumbling further. The CFTC reported in the fourth weekly period that speculators increased short positions by nearly 14,000 to 153,000 lots, the highest level since last December. Hence, non-commercial net long positions continued to fell closing nearly 9,000 lots narrower at 13,700 lots, the lowest level since March. Nonetheless, open interest continued to deflate, falling a significant 28,600 lots to 1,149,000 contracts.

The daily average for the Nymex WTI front month in September was $63.90/b, a drop of $9.18/bor 12.5% from August. Non-commercial average net long positions were some 30,000 or nearly40,000 lots less than in the previous month, yet 36,000 higher than last year. Non-commercialweekly average longs dropped by 18,000 lots while shorts rose 22,000 lots. Open interest’sweekly average was 1,177,600 contracts, 26,000 lots higher than last month and some310,600 contracts over the year-ago level.

The Forward Structure
The near month spread narrowed in September with the 1st/2nd month forward structure 25¢ narrower incontango at 94¢/b. However, the further forward month spreads continued to widen, with the 1st/6th,12th, and 18th month average spread at $3.86/b, $5.65/b and $5.92/b or 32¢, $1.32/b and $2.13/b wider.Yet, average weekly crude oil stocks in the USA in September stood at 327 mb, some 5 mb lowerthan in August in part due to the continued impact of higher prices inspiring inventory depletion. Yet,stocks were 18 mb higher than the same period last year.

Forward market structure and implications for crude oil stocks
The relation between the contango in the forward structure (1st/2nd month spread) and the crude oilstock level in the USA. The rises in crude oil stocks are in part due to the structure of the forward market which has been in contango for nearly 2 years. This correlation was evident in 2005 and was continued over the first nine months of 2006. Generally speaking, a steeper contango should result in higher stocks levels. The US monthly average for crude oil stocks in 2004 was 289 mb, up 7.4 mb from 2003. In 2005, theaverage was 317.7 mb, up 28.3 mb, while in 2006 the average was almost 20 mb higher at 337.6 mb. A similar correlation can be seen when applied to the OECD on a monthly basis with the average of Brent, Dubai and WTI 1st/2nd month spread. The traditional relationship between stocks and pricesdecoupled in 2005 and continued into 2006. As a result the relation can be established, the higher the procurement, the higher oil price tends to move in the USA. As indicated above, the monthlyaverage of US crude oil inventories jumped in 2004 by 2.6%, while WTI prices increased on average by nearly 33% to $41.39/b. In 2005, stocks were up nearly 10%, while WTI was up over36% to $56.47/b. In the first nine months of 2006, WTI crude prices surged over 20% to $67.94/b andinventories built by over 6% on average. A similar analysis was carried out between prices and crude oil stocks in the OECD with the average price for Brent, WTI and Dubai revealing a similar correlation that the higher the stocks, the higher the average global prices.

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