After a significant recovery, the OPEC Reference Basket (ORB) fell nearly 7% in
July. This is amid lower-than-predicted demand, high refined product stocks
during the peak summer driving season and rising crude supply, which have all
significantly exerted pressure over the month. Bearish speculative activities also
weighed on oil prices. The ORB slipped $3.16 to average $42.68/b in July, and
declined by 32.6% y-o-y.
Amid rising concerns that a global excess of crude and refined products would
pressure markets, delaying a long-anticipated rebalancing of the market,
international crude futures fell on both sides of the Atlantic in July. Oil prices
have also been through a turbulent period since UK voters opted to leave the EU.
ICE Brent ended down $3.39 at $46.53/b, dropping around 29% on the year.
Nymex WTI plunged $4.05 to $44.80/b, slipping by about 24% y-t-d. Speculators
were once again bearish in all markets. The Brent-WTI, or transatlantic, spread
widened to $1.75/b in Brent’s favour during the month, discouraging US imports
of West African crudes and other Brent-related grades, while also encouraging
some US crude exports.
OPEC Reference Basket
After a significant recovery for five consecutive months from its lowest value in years, the
ORB slipped nearly 7% in July, falling against a backdrop of less-than-anticipated demand,
high stocks, particularly of refined products, and rising supply. Hedge funds have also
turned more negative, contributing to further pressure on oil prices.
The ORB price declined over the month, as pressure from an excess of crude and oil
products mounted worldwide. Slower economic growth and high inventories of crude and
refined oil products have driven the value of the ORB to almost 7.9% below its 2016 high
reached in the previous month. Rising stockpiles of gasoline, despite the peak summer
driving season in the US, have added to the worries. Nevertheless, the ORB remained up
more than 60% from the 12-year low seen at the beginning of the year.
The recovery faded after prices above $45/b enticed US oil drillers to return to the well pad.
Drillers added 33 rigs in July, the most in a month since April 2014. Cheap crude has led refiners to produce more refined products worldwide, adding to the oversupplied market. The overhang of gasoline in storage amid what should have been a top seasonal demand period put downward pressure on crude and refined product prices.
On a monthly basis, the ORB decreased $3.16 to $42.68/b, on average, down 6.9%.
Compared to the previous year, the ORB value declined by 32.3%, or $17.78, to $37.20/b.
In line with the main global oil benchmarks, all ORB component values dropped over the
month. WTI, Dated Brent and Dubai spot prices plunged by $3.84, $3.28 and $3.61,
respectively, weighing on the values of all ORB components, despite improving price
differentials in key regions.
The Middle East spot component grades Murban and Qatar Marine, fell on average by
$2.74, or 5.6%, to $46.54/b, while multi-destination grades, Arab Light, Basrah Light, Iran
Heavy and Kuwait Export, decreased by $3.16, or 7%, to $41.87/b. For the Latin American
ORB components, Venezuelan Merey was down $1.51, or 4%, at $36.71/b, while Oriente
slid $3.31, or 7.5%, to $40.72/b. Values of West and North African light sweet Basket
components – Saharan Blend, Es Sider, Girassol, Bonny Light and Gabon’s Rabi –
decreased by $3.29, or 6.9%, to average $44.74/b. Indonesian Minas was down the most
by $9.72, or 18.9%, at $41.84/b, from above $50/b in the previous month.
On 9 August, the ORB was down at $41.08/b, $1.60/b below the July average.
The oil futures market
Oil futures fell for the first time since January on pressure from an excess of crude and
refined products, particularly in the US and Europe. Slower-than-expected end-user
demand, as well as refinery buying also weighed on the market, amid rising concerns
that a global excess of crude and refined products would delay a long-anticipated
rebalancing of the market.
The oil complex was pressured by lingering concerns that US and European refiners
could slash runs, decreasing crude demand, in response to a declining gasoline crack
in both regions in a period when summer driving and margins should have been at their
highest during the year. Moreover, oil prices have been through a turbulent period
since UK voters opted to leave the EU. Right after the results became apparent, oil
sold off alongside all other risk assets. This was then followed by a rebound that took
prices almost all the way back to the starting point, only to fall again, this time through
the lows set in the aftermath of the Brexit decision. The support from some supply
outages and draws in US crude inventories were offset by the deterioration in the
refined product markets and the bearish consequences of the rising dollar.
Furthermore, hedge funds were liquidating their former record bullish positions in crude
futures and options, putting downward pressure on oil prices.
ICE Brent ended July down by $3.39, or 6.8%, at $46.53/b on a monthly average basis,
while Nymex WTI plunged by $4.05, or 8.3%, to $44.80/b. Compared to the same
period last year, ICE Brent lost $17.15, or 29.1%, at $41.81/b, while Nymex WTI
declined by $12.67, or 23.9%, to $40.28/b y-t-d.
On 9 August, ICE Brent stood at $44.98/b and Nymex WTI at $42.77/b.
As oil prices fell, speculators cut their bullish bets on higher oil prices significantly over
July, turning very bearish. Relative to the end of the previous month, speculators
reduced net long positions in ICE Brent futures and options by 74,229 contracts, or
20%, to 288,536 lots, by the last week in July, exchange data from ICE showed.
Similarly, money managers decreased net long US crude futures and options
positions by 58,874 lots, or a hefty 33%, to 120,556 contracts, the US Commodity
Futures Trading Commission (CFTC) reported. Meanwhile, the total futures and options
open interest volume in the two exchanges decreased by 1.9%, or 99,438 contracts,
since the end of June to 5.21 million contracts at the end of July.
During July, the daily average traded volume for Nymex WTI contracts decreased by
2,932 lots, down 0.3% to 942,073 contracts, while that of ICE Brent was
41,228 contracts higher, up by 5.7%, at 765,613 lots. The daily aggregate traded
volume for both crude oil futures markets increased by 38,296 lots to about 1.71 million
futures contracts, equivalent to around 1.7 billion b/d. The total traded volume in
Nymex WTI dropped near 10% to 18.84 million contracts due to holidays, while
ICE Brent increased to 16.08 million lots.
The futures market structure
With the return of the supply glut in the US and Asia, as it spilled over from refined
products to crude, the Dubai market structure flipped back into contango while the WTI
contango weakened further. Dubai crude was also pressured from a significant
narrowing of the Brent-Dubai spread, which made alternative crudes more attractive
compared to Dubai-related crudes. Despite the overhang of unsold North Sea light
sweet cargoes and worsening refining margins, Brent managed to strengthen its
structure slightly amid supply disruptions of West African crudes.
In the WTI market, the front month 64¢/b discount to the second month increased to
73¢/b, while that of Dubai also deteriorated, dropping from an 18¢/b premium to a
72¢/b discount. The Brent market structure narrowed from a 60¢/b contango to 55¢/b.
The Brent-WTI spread widened to $1.75/b in Brent’s favour during July, deincentivizing
US imports of WAF crudes and other Brent-related grades, while also
incentivizing some exports of US crude. The relative strength in Brent, which has also
been reflected in narrower contango spreads, drew support from the Nigerian outages
as well as Tengiz field maintenance, which is likely to cut the CPC Blend supply.
Meanwhile, on the WTI side, the market has had to contend with the full return of
Canadian barrels as well as an uptick in US drilling activity and somewhat
disappointing refinery runs. The prompt-month ICE Brent-WTI spread averaged $1.07/b
in June, widening to $1.74/b in July.
The light sweet/medium sour crude spread
The sweet/sour differentials narrowed further in the US Gulf Coast (USGC) and
Europe, while in Asia, they widened significantly amid the narrower Brent/Dubai
spread.
In Europe, the Urals medium-sour crude discount to light-sweet North Sea Brent
decreased again in July, whereas the Dated Brent-Med Urals spread narrowed to
about $1.25/b from $1.70/b in June. The Mediterranean sour crude market remained
relatively buoyant compared with the regional sweet crude market, which has been
harder hit by the fall in cracks for distillates and clean products in general. Despite
additional supplies from the Middle East, Urals crude price differentials strengthened
on keen buying interest and a quite tight loading plan, particularly during the first half of
the loading month, due to maintenance on a pipeline.
In Asia, the light sweet Tapis premium over medium sour Dubai reversed course this
month to increase by around $1 to $4.30/b. The strength in Dubai prompt prices has
narrowed its price gap with Brent to the smallest since November. The narrower spread
supports demand for Asia-Pacific crude which is mostly priced off Dated Brent.
Meanwhile, Middle East sour crudes stayed mostly depressed over the month on
ample supply and as weak margins for naphtha and gasoline weighed on lighter
grades. The lower Brent premium over Dubai also weighed on Middle East grades
amid concerns that it will lead to an increased arbitrage flow of crudes priced on Brent.
In the US Gulf Coast, the Light Louisiana Sweet (LLS) premium over medium sour
Mars slipped slightly in July to $5.20/b, down by 10¢. Mars was supported somewhat
by USGC pipeline work that will reduce Mars production. Tighter supplies of alternative
sour Colombian Vasconia and Iraqi Basra grades also lifted Mars. Falling crude flows
through the TransCanada Keystone pipeline system provided some further backing.
