The OPEC Reference Basket increased further in June by $2.45 to $107.89/b, its highest value this year. Its year-to-date value stood at $105.30/b. Crude oil futures were sharply higher as concerns mounted that geo-political tension could disrupt oil supplies. This is despite the fact that crude oil markets were adequately supplied. The Nymex WTI front-month gained $3.35 over the month to average $105.15/b. Compared to the same period in 2013, the WTI value was significantly higher, by $7.33, at $100.84/b. On the InterContinental Exchange
(ICE), the Brent front-month gained $2.73 to $111.97/b. Year-to-date, ICE Brent, at $108.82/b, was higher compared to the same period last year. Speculators' net bets on rising Brent prices hit a record high on geo-political tension in the Middle East. Money managers increased their net long futures and options positions in ICE Brent by 18,451 lots to 242,201 contracts, the highest ever recorded by the exchange. The Brent/WTI spread closed the month at less than $7/b after having widened to nearly $10/b mid-month, when Brent was at a ninemonth peak due to concerns over reduced exports from Iraq. The Nymex WTI was supported by positive microeconomic data from the US. The Brent/WTI spread ended the month narrower at $6.82/b.
OPEC Reference Basket
The OPEC Reference Basket (ORB) extended its previous month’s gains by nearly
$2.50 in June to reach its highest value this year, uplifted by a surge in crude oil
outright prices. For most of June, global crude oil markets were rattled by supply
concerns due to the ongoing crises in Libya and Ukraine, while the geopolitical tension in Iraq has fuelled fears of disruption in exports from the Middle East region. This is despite the fact that crude oil markets were adequately supplied during the month. In fact, some markets were over supplied amid poor refining economics, which caused physical crude oil markets in many regions to weaken significantly. Physical crude markets were under pressure with the differentials of physical crudes to their respective benchmarks at their lowest in over a year in most markets. Moreover, these supplyrelated headlines and geopolitical tension in Iraq and Ukraine kept the speculators on the long side of the market, supporting a rise in prices.
On a monthly basis, the ORB improved to an average of $107.89/b in June, up $2.45, or 2.33% over the previous month. On a year-to-date basis, the Basket was higher, the first time since December 2012, compared to the same period last year. The Basket year-to-date value stood at $105.30/b compared to the $105.09/b average of last year, 21¢ or 0.20% higher.
All Basket component values increased in June mainly due to the uplift in outright
prices of their respective benchmarks and pricing formula elements. Benchmark prices, particularly Brent, surged in response to fresh geopolitical tension in Iraq in addition to the ongoing conflicts in Libya and Ukraine that raised supply disruption concerns, increasing the geopolitical risk premium.
Nevertheless, this support for the component values was countered by pressure from
lacklustre physical crude demand on the part of major buyers and weak refining
margins. A narrowing in refining margins has hit European demand for both sweet and sour crudes, while large customers such as China have been buying less West African crudes due to high product stocks, cheaper crude in other markets and higher freight rates. West African oil has become relatively expensive for Asian importers due to a high premium of Brent crude oil, against which it is benchmarked, to Dubai crude.
Asia's crude demand has also been muted as weak demand for oil products coupled
with excess regional supply are expected to keep refinery operating rates lower
through the third quarter and into the end of the year. Crude availability is also higher
due to fewer imports into North America, with Canada now following in the US’
footsteps and using light tight oil imported from the US Gulf Coast (USGC) to crowd out imports of more expensive Dated Brent-related crudes. This leaves Asia to absorb excess Atlantic Basin barrels. But Asian interest in Brent cargoes was lacklustre due to a relatively wide Brent/Dubai spread that reflected the geopolitical risk premium in Brent.
Brent-related Basket components, Saharan Blend, Es Sider, Girassol and Bonny
Light rose $1.84, on average. Both Latin American Basket components, Merey and
Oriente, performed in line with the enhancement of the WTI mark, in general, and
pricing formula components, improving over the month on average by almost 3%. The formula elements strengthened progressively, benefitting from infrastructure changes that relieve constraints on outbound capacity from the Permian region. Increasing buying interest for Latin American crudes form outside the region, mainly Europe, amid high European prices supported these grades as well. Oriente and Merey increased in June by $3.28 and $2.65, respectively. Middle Eastern spot prices also rose in line with the increase in Oman and Dubai outright prices, despite weak Asian refining margins and lower refinery runs that weighed on Middle East crude. Middle Eastern spot components and multi-destination grades improved by around $2.40 and $2.45, respectively. On 9 July, the ORB stood at $105.49/b.
The oil futures market
Crude oil futures were sharply higher over the month amid fears of supply disruption
due to the crises in Iraq and Ukraine in addition to the ongoing tension in Libya.
Oil prices jumped to nine-month highs in June as concerns mounted that escalating
geopolitical tension in Iraq could disrupt oil supplies. The European benchmark
ICE Brent gained over $2.70 to reach its highest monthly average since February 2013, while the US Nymex WTI surged more than $3 to achieve its highest value in more than nine months.
Crude oil prices were also supported by positive economic data from the United States and China. New orders for US factory goods rose for a third straight month in April, pointing to strength in manufacturing and the broader economy. The US Commerce Department said new orders for manufactured goods increased by 0.7%. March’s orders were revised to show a 1.5% increase instead of the previously reported 0.9% rise. US employment returned to its pre-recession peak in May at 6.3% with a solid pace of hiring, offering confirmation that the economy has snapped back from a winter slump.
China’s exports beat forecasts in May on firmer global demand, rising 7% from a year earlier and quickening from April's increase of 0.9%. Meanwhile, China’s consumer inflation edged up to a four-month high of 2.5% in May while factory price deflation eased, reinforcing signs of stabilization in the economy.
Nymex WTI front-month gained $3.35 over the month, to average $105.15/b in June.
Compared to the same period in 2013, the WTI value is significantly higher, by $7.33 or 7.8%, at $100.84/b. On the ICE exchange, Brent front-month increased $2.73 to reach an average of $111.97/b. Year-to-date, ICE Brent was, for the first time in many months, higher in value compared to the same period last year. Its value strengthened by 94¢ or 0.9% to reach $108.82/b. On 9 July, ICE Brent stood at $108.28/b and Nymex WTI at $102.29/b.
Speculators' net bets on rising Brent crude oil prices hit a record high in June, figures
from the ICE show, as geo-political tensions in Iraq escalated, threatening oil supplies. Large money managers increased their net long futures and options positions in ICE Brent by 18,451 lots to 242,201 contracts in the week to 24 June, the highest ever recorded by the exchange. Long positions in Brent held by money managers now outnumber short positions by a ratio of six to one, ICE data shows. Although the turmoil in Iraq is a long way from its southern oilfields and export terminals which account for around 90% of oil exports, investors say spot oil prices were reflecting the possibility that oil production may be affected. Data from the US Commodity Futures Trading Commission (CFTC) showed that hedge funds and money managers increased their bullish bets in US crude oil futures by raising their net long US crude futures and options positions during June as prices increased. The speculator group raised its combined futures and options positions in US crude oil contracts to 356,336 lots by mid-month.
The daily average traded volume during June for Nymex WTI contracts increased by
52,823 lots to average 542,481 contracts. The ICE Brent daily traded volume surged by a hefty 139,065 contracts to 669,064 lots. On the day the tensions in Iraq started, the daily traded volumes in both exchanges doubled on worries about the supply outlook. The daily aggregate traded volume in both crude oil futures markets increased by 191,888 contracts in June to around 1.21 million futures contracts, the equivalent of around 1.20 billion barrels per day. The total traded volume in Nymex WTI and ICE Brent contracts was 11.40 and 14.10 million contracts, respectively, over the month.
The futures market structure
The backwardation in the Brent market structure eased slightly in the first half of June
amid multiple supply disruption threats in regions surrounding the Brent market. But
this changed after mid-month due to the overall poor demand situation in the
North Sea, while availability of light-sweet crude from West Africa, the Caspian and
Algeria was also high. Nevertheless, the unrest in Libya and Ukraine continue to
support the backwardation. The spread between the second and first month of the
ICE Brent contract average dropped to around 60¢/b in June compared to 70¢/b in the previous month.
The Nymex WTI front-month continued to be at a premium of around 65¢/b over the
future months’ contracts for the second month in a row as the stock level in Cushing
has stabilized to around 20 mb. Since Enterprise reversed Seaway in May 2012, the
pipeline had been the only major line taking oil out of the then clogged-up Cushing hub to USGC-area refineries. Inventories at Cushing peaked at all-time highs of 52 mb at the start of 2013. With the help of the original 400 tb/d Seaway pipeline and
TransCanada's 700 tb/d USGC pipeline, which began operations at the start of this
year, Cushing stocks have halved to 21 mb since January. The start of the USGC
pipeline has increased the capacity of pipelines leaving Cushing to above the capacity of pipelines coming into the hub. Meanwhile, Enterprise Product Partners planned to complete its 450 tb/d Seaway twin crude oil pipeline, taking oil out of the Cushing storage hub to the USGC by the end June.
The spread between the two benchmarks closed the month at an average of less than $7/b after having widened to nearly $10/b mid-month when Brent was at a nine-month peak due to reduced concerns over exports from Iraq. Output from Iraq's southern oilfields, which produce most of the nation's 3.3 mb/d, remained unaffected by fighting in the north and west. Meanwhile, Nymex WTI was supported by positive microeconomic data from the US. The prompt Brent/WTI spread ended the month narrower at an average around $6.82/b, after settling at $7.45/b in the previous month.
The light sweet/medium sour crude spread
Global sweet/sour differentials widened in all regions over the month, affected by the
performance of the refined product market. The Tapis/Dubai spread in Asia widened slightly on average in June at a premium of around $7.05/b for Tapis over Dubai, 30¢ better than the previous month. After a strong early June performance, Dubai weakened over the second half of the month despite the Asia-Pacific’s August refining maintenance estimated to be some 2.6 mb/d less than the peak turnarounds in May, the lowest level over the year. Factors that may have exerted downward pressure were poor refining margins at the Singapore hub, with this providing little incentive for crude buying. Meanwhile, some pressure for the light-sweet grade is coming from weak middle distillate values, while the naphtha crack is expected to come under pressure in the coming months from higher Western inflows,
estimated at 1.35 mb/d in July. India’s maintenance has also been wrapped up,
implying an uptick in naphtha supplies from the subcontinent, as well.
In Europe, the discount of the Russian medium sour Urals in the Mediterranean to
North Sea Dated Brent widened further, due solely to the weak Urals markets. Despite tight availability of Urals, an extraordinarily lacklustre demand on the back of poor refining margins and a strong presence of alternative sour grades, particularly Iraqi Basrah Light, weighed on Urals differentials. The declines went against the normal seasonal trend, which sees Urals appreciating ahead of the peak summer months.
From the point of view of supply alone, the month should not have been bearish as
scheduled Russian supplies of Urals loading out of Novorossiysk slipped to their lowest levels in more than seven years. Given the ongoing issues impacting Iranian crude and the complete standstill of Kirkuk flows since March, a tight Russian schedule would, under normal circumstances, have been expected to add some support to the market.
On average, the Dated Brent/Urals spread in June widened by 40¢ to $2.20/b.
In the US, the Light Louisiana Sweet (LLS) premium over the medium sour Mars
widened by almost 30¢ to $4.75/b with some support coming from product markets.
Gasoline cracks on the USGC strengthened a little over the month while fuel oil cracks widened, pressuring Mars. Additional pressure for Mars may have come from talk of a possible strategic petroleum reserve (SPR) release of medium-sour crude as a means to calm soaring outright prices on the back of geopolitical tension in Iraq.