Crude Oil Price Movements - June 2017

Source: OPEC_RP170603 6/13/2017, Location: Europe

The OPEC Reference Basket (ORB) averaged $49.20/b in May, down more than 4% from April to sit at its lowest value for the year. The oil market was range bound and bearish for most of the month, despite the OPEC and non-OPEC decision on 25 May to extend their production adjustments until the end of March 2018. Oil has been weighed down by the market's impatience with the generally slow pace of the global inventory drawdown amid a significant recovery in global oil supplies, particularly from the US. Year-to-date (Y-t-d), the ORB value was 49.2% higher or $16.90, at $51.25/b.

Month-on-month (m-o-m), the two main oil futures tumbled more than 4.5% to their lowest value since November 2016, given the plentiful supplies and despite the OPEC and non-OPEC decision. Eight consecutive weeks of US crude oil inventories draws, albeit at a slow pace, also failed to support oi futures. ICE Brent ended $2.42 lower in May, a drop of 4.5% to stand at $51.40/b, while NYMEX WTI plunged $2.58 or 5%, to stand at $48.54/b. Y-t-d, ICE Brent is $14.38 or 36.5% higher at $53.78/b, while NYMEX WTI rose $13.13, or 34.7%, to sit at $50.97/b.

The ICE Brent/NYMEX WTI spread widened slightly despite successive weeks of US crude stocks draws. This prompted more US exports, augmenting light crude availabilities in the Asia-Pacific and Europe. The spread widened to $2.86/b, a 16Cent expansion.

Money managers decreased their bets on higher oil prices by about 19% in NYMEX WTI futures and options and around 2% in those for ICE Brent. Net long positions in NYMEX WTI declined to 206,103 contracts, and in ICE Brent they were lowered to 349,880 lots.

As the oil market moved toward higher seasonal crude demand and refinery runs, the contango structure eased in all markets. While limited sour crudes supplies to the Asian region, due to OPEC production adjustments, helped the Dubai market structure, consecutive weeks of crude inventories draws in the US supported the easing of the WTI contango.

Apart from the Mediterranean, the sweet/sour differentials continued to sustain a narrowing trend in all markets as OPEC and non-OPEC production adjustments started to limit the availability of sour grades, while increasing production in the US and the Atlantic basin resulted in a continued glut of light sweet crude supply.

OPEC Reference Basket
On a monthly average basis, the ORB ended May down more than 4% m-o-m to sit at its lowest value for the year. Its May average is the first time it has been below $50/b on a monthly basis since November 2016.

The oil market was range bound and the sentiment bearish for most of May, despite the OPEC and non-OPEC decision on 25 May to extend production adjustments until the end of March 2018. Oil prices edged down earlier in the month as a recovery in Libyan and Nigerian output and rising US supplies raised worries about excess supply. Oil has been weighed down by the market's impatience with the generally slow pace of the inventory drawdown globally, even after major oil producing countries decided at the end of 2016 to reduce oil production by around 1.8 mb/d in the first half of 2017. Oil prices plunged further to five-month lows amid record trading volumes, as major oil producers ruled out deeper production adjustments.

M-o-m, the ORB value declined $2.17 to settle at $49.20/b on a monthly average, down 4.2%. Compared to the previous year, the ORB value, y-t-d was 49.2% higher or $16.90, at $51.25/b. ORB component values slipped along with relevant crude oil benchmarks and the monthly changes in theirrespective official selling price (OSP) differentials. The crude oil physical benchmarks in May, namely Dated Brent, WTI and Dubai spot prices, dropped by $2.14, $2.50 and $1.84, respectively.

As plentiful Atlantic basin supply pressured the price differentials for light sweet crude components from West and North Africa Basket, their values deteriorated alongside outright prices for the crude benchmark Brent. Saharan Blend, Es Sider, Girassol, Bonny Light and Gabon’s Rabi values decreased $2.20 on average, or 4.2%, to $49.86/b in May. Physical crude differentials for these grades have been under pressure for several months as supply has surged. Despite an uplift in OSP offsets and support from healthy global sour markets, lower regional crude oil benchmarks forced down the value of multiple-region destination grades, Arab Light, Basrah Light, Iran Heavy and Kuwait Export. On average, these value of these grades deteriorated by $2.20 for the month, or 4.3%, to $48.88/b. The Middle Eastern spot components, Murban and Qatar Marine, saw their values decline by $2.26, or 4.2%, to $51.10/b. The OPEC and non-OPEC production adjustments have provided support for Latin American grades as global supplies for heavier sour crude have tightened. Yet, price gains for these crudes have been capped by slower demand from Chinese independent refiners amid uncertainty over their crude import quotas for the rest of 2017. The Latin American ORB components, Venezuelan Merey and Ecuador’s Oriente edged down to $45.16/b and $46.91/b, respectively. They lost 99Cent, or 2.1%, and $1.79, or 3.7%, respectively.

On 12 June, the ORB stood at $45.93/b.

The oil futures market
Oil futures on both sides of the Atlantic tumbled more than 4.5% m-o-m to their lowest value since November 2016. This was due to plentiful supplies, especially in the US where output continued its upward trend, and despite the OPEC and non-OPEC production adjustments. Eight consecutive weeks of crude oil inventory draws, albeit at a slow pace, also failed to support oil futures. There was also a sign of slowing energy demand in China, the world's second largest oil consumer, with a recent survey showing April growth in the country’s services sector at its slowest in almost a year.

Although oil prices rebounded from five-month lows in mid-month, following positive US jobs data and assurances by Saudi Arabia that Russia is ready to join OPEC in extending production adjustments to reduce a persistent supply glut, the market remained in technically oversold territory with futures trading down as much as 19% from highs in mid-April. This prompted some money managers to exit their long positions. Oil futures also fell following the 25 May decision by OPEC and non-OPEC producers to extend production adjustments for nine more months to end of March 2018. Oil prices tumbled sharply despite the extension of the output adjustments. While OPEC's move had been expected, some oil market investors had hoped producers might agree to deeper adjustments. The decision was greeted by a sell-off, with 25 May daily WTI volumes of 1.1 million contracts the highest since the 30 November 2016 session, when OPEC first announced its production adjustments.

Pressure mounted as countries that are not part of OPEC and non-OPEC’s production adjustments increased output. For example, US crude output continued on its 2017 upward trend, with March production increasing by 62 tb/d to about 9.1 mb/d, according to US Energy Information Administration (EIA) data. Rising output from Nigeria, Libya and the North Sea kept the Atlantic basin well supplied with light sweet crude, weighing on crude values. Nigerian crude production rose to 1.68 mb/d, the highest level in more than one year. This followed the restart of Forcados loadings for the first time since October 2016.

ICE Brent ended May $2.42 lower, a decrease of 4.5%, to stand at $51.40/b on a monthly average basis, while NYMEX WTI slipped $2.58, or 5.0%, to $48.54/b. Y-t-d, ICE Brent is $14.38, or 36.5% higher at $53.78/b, while NYMEX WTI swelled $13.13, or 34.7%, to stand at $50.97/b.

On 12 June, ICE Brent stood at $48.29/b and NYMEX WTI at $46.08/b.

In the period ending 30 May, managed money activities decreased their bets on higher oil prices by about 19% in NYMEX WTI futures and options and 2% for ICE Brent, relative to the end of the previous month. Speculative net length in NYMEX WTI declined 49,318 contracts from its level on 25 April, to 206,103 contracts in the week to 30 May. Similarly, in ICE Brent futures and options, speculators lowered net long positions by 8,386 contracts, or 2%, to 349,880 lots. The total futures and options in open interest volume for the two exchanges was down 1% to 5.69 million contracts, and the share of net length positions decreased to 9.8% from 10.7%.

Hedge fund managers had already closed out many of their bearish short positions in crude oil before the OPEC and non-OPEC meeting on 25 May, according to data from regulators and exchanges. The spell of short-covering explains why oil prices rose consistently in the run up to the meeting then sold off sharply afterwards. Money managers raised their net long positions in the main Brent and WTI futures and options contracts by the equivalent of 89 mb in the week to 23 May. The net long position increased for a second week running, after rising 6 mb the previous week, but only after it had fallen by 308 mb in the three weeks prior to that. Nearly all of the most recent increase came from a sharp reduction in the number of short positions, which fell by 87 mb, rather than an increase in long positions, which were up by just 2 mb. Hedge fund managers gradually accumulated short positions between mid-April and mid-May amid growing concerns about the pace of the rebalancing. However, as the OPEC meeting approached, many of those short positions were closed as a precaution against any surprise in the market.

The daily average traded volume for NYMEX WTI contracts surged 134,095 lots, or 12%, to 1,251,216 contracts, while that of ICE Brent was 124,025 contracts higher, up 13% at 1,087,563 lots. The daily aggregate traded volume for both crude oil futures markets increased a hefty 258,120 contracts to 2.34 million futures contracts, or near 2.3 billion b/d of crude oil. The total traded volume NYMEX WTI futures in May was significantly higher at 27.53 million contracts, up 30%. Similarly, ICE Bent futures volumes increased 31% to 23.93 million contracts.

The futures market structure
As the oil markets headed toward higher seasonal crude demand and refinery runs, the contango structure eased in all markets. M-o-m, the Brent contango tightened in May, compared to April. However, toward the end of the month, the forward market structure flattened, all but eliminating any of the backwardation that had built up earlier in the month. The contango widened as rates for prompt-loading barrels fell from their highest in nearly nine months, on account of a persistently large surplus of oil in the region. Oil market uncertainty regarding the pace of the rebalancing, coupled with market players cashing in on higher prices for prompt-loading barrels, brought the Dated Brent forward curve to a sharper contango. While limited sour crudes supplies to the Asian region, due to OPEC production adjustments, helped the Dubai market structure, consecutive weeks of US crude inventories draws supported an easing in the WTI contango.

The Dubai M1 70Cent/b discount to M3 decreased to 40Cent/b. The North Sea Brent M1/M3 discount eased to 55Cent/b on average, from 89Cent/b in the previous month. In the US, the WTI contango eased 13Cent/b as WTI’s(M1-M3) narrowed to 60Cent/b.

The ICE Brent/NYMEX WTI spread widened slightly despite successive weeks of US crude stocks draws. This prompted more US exports, augmenting light crude availabilities in the Asia-Pacific and Europe. US midcontinent demand for light Canadian synthetic oil fell following the start of Energy Transfer Partners’ 470 tb/d Dakota Access pipeline, which delivers light North Dakota Bakken crude to Patoka, Illinois. Dakota Access also connects to another pipeline that runs to Nederland, Texas, resulting in a glut of light sweet crude in Texas. The first-month ICE Brent/NYMEX WTI spread widened to $2.86/b, from $2.70/b, an increase of 16Cent/b.

The light sweet/medium sour crude spread
Apart from the Mediterranean, the sweet/sour differentials continued to sustain a narrowing trend in all markets as OPEC and non-OPEC production adjustments limited the availability of sour grades, while increasing production of in the US and the Atlantic basin glutted the supply of light sweet crudes.

In Asia, the Tapis premium over Dubai contracted a further 51Cent on a monthly average to $1.79/b, amid limited sour crudes and ample supplies of light sweet crude available to refiners. The Dated Brent/Dubai spread also narrowed further by 30Cent, to a premium of 2Cent/b, its narrowest since August 2014, when Dubai traded at a 17Cent premium to Dated Brent. The Asia-Pacific light sweet crudes, such as Tapis continue to be pressured by a narrowing Brent-Dubai spread, which encourages the arbitrage flow of Brent related light sweet crudes to the region from all other regions. The flows will likely continue following the OPEC and non- OPEC decision to extend production adjustments for a further nine months.

In Europe, in contrast, the light sweet North Sea Brent premium to Urals medium sour crude increased by 37¢ to $1.41/b. Urals price differentials to Dated Brent weakened in the Mediterranean amid more barrels from Novorossiisk in May due to an accident at Lukoil's Perm plant that pressured the market. An oversupply of light sweet grades in the Mediterranean, as well as buyers starting to buy more cheap sweet grades, especially in Asia, also put pressure on Urals crude. Urals differentials to Dated Brent softened as an oversupply of light sweet grades started to put pressure on medium-sulphur crude oil and the arbitrage to Asia seemed to beclosed for the first time in three months.

In the USGC, the Light Louisiana Sweet (LLS) premium over medium sour Mars reduced further to $3.13/b, its narrowest since April 2015. Sour crudes continued to firm on increased demand for export and USGC refinery demand due to less availability of Middle East sour crudes. The high USGC sour crude prices helped draw in alternative Latin American cargoes, which are also going to the Asia-Pacific, as reduced Mideast Gulf sour crude exports boosted interest in alternatives.


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