Crude Oil Price Movements - August 2016

Source: OPEC_RP160803 8/10/2016, Location: Europe

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.

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