The OPEC Reference Basket (ORB) declined in June to $45.21/b, down more than 8% to its lowest value for the year. The oil market witnessed a sell-off amid significant bearish sentiment ignited by excess oil supply and still-high oil inventories, despite ongoing high conformity by OPEC and non-OPEC participating producers. Oil continued to be weighed down by the slow pace of inventory drawdown globally amid a rebound in global oil supplies. Since reaching a 2017 peak in early February, the ORB’s value dropped 21% by June. Nevertheless, towards the end of the month, its value recovered. Year-to-date (Y-t-d), the ORB’s value was 38.3% higher or $13.90, at $50.21/b.
Month-on-month (m-o-m), the two main oil futures tumbled into bearish territory in June, with ICE Brent settling below $50/b for the first time this year amid a new cycle of short-selling on concerns that rising global supply will counter output adjustments by OPEC and non-OPEC producers. US crude inventories remain more than 100 mb above the five-year seasonal average. ICE Brent ended June $3.85 or 7.5% lower at $47.55/b, while NYMEX WTI plunged $3.34 or 6.9%, to stand at $45.20/b. Y-t-d, ICE Brent is $11.47, or 27.8%, higher at $52.68/b, while NYMEX WTI increased by $10.17, or 25.6%, to $49.95/b.
The ICE Brent/NYMEX WTI spread narrowed on successive weeks of US crude stock draws and ample light sweet crudes supplies in Europe. This tighter spread has weakened demand for US crude from Asian refiners. The spread narrowed to $2.36/b, a 50Cent contraction.
Money managers’ bearish, or short, bets on crude oil prices have exploded further in June. In the US, crude market short positions doubled in just two months to an equivalent of nearly 180 mb, while in the Brent market investors are sitting on record short positions of nearly 177 mb.
The contango structure widened marginally in the Brent and Dubai markets on ample supplies in Europe and somewhat slower demand in Asia. However, there was a backwardation of forward market structures earlier for the second half of 2017 which has flipped into contango for the entire futures curve of both NYMEX WTI and ICE Brent.
The sweet/sour narrowing differentials trend that began earlier in the year eased on the US Gulf Coast (USGC) and in Asia. However, sour crudes continued to strengthen relative to sweet in the European market as OPEC and non-OPEC supply adjustments limited availability of the sour grade while increasing production in the US and the Atlantic Basin created a glut of light sweet crudes.
OPEC Reference Basket
On a monthly average basis, the ORB declined sharply in June for the second month in a row. It was down around 8% m-o-m to its lowest value for the year and remained below $50/b. The oil market witnessed significant bearish sentiment in June, ignited by excess oil supply and still-high oil inventories, despite ongoing high conformity by OPEC and non-OPEC oil producers. Oil has been weighed down by market exasperation with the slow pace of inventory drawdown globally, even as major oil producers continue to reduce oil production by 1.8 mb/d for the entire first half of 2017. Refinery demand was also good this spring, with crude runs setting twice at weekly all-time highs, pulling crude stocks lower in eleven of the last 13 reporting periods, according to Energy Information Administration (EIA) data. Even with inventories chipping away at the surplus to the five-year average, prices fell to lows not seen since November 2016, revealing some fear that refiners will start scaling back operations, thus removing a key driver. The ORB also ended the second quarter down by a significant 6.6%, the first and largest decline since a fall of nearly 25% quarterto-quarter in 1Q16. Nonetheless, it remained above $50/b y-t-d. Furthermore, since the 2017 high of $54.24/b struck in early February, the ORB value plunged by 21% in June to reach to its lowest value so far this year at $42.58/b late in the month.
However, toward the end of the month the oil market recovered somewhat with the ORB ending the last session of June at $45.63/b. M-o-m, the ORB value declined $3.99 to settle at $45.21/b on a monthly average, down 8.1%. Compared to the previous year, the ORB value was 38.3% higher, or $13.90, at $50.21/b.
ORB component values plunged along with relevant crude oil benchmarks. Crude oil physical benchmarks, namely Dated Brent, WTI and Dubai spot prices, dropped in June by $4.03, $3.39 and $4.09, respectively.
The Latin American ORB components Venezuelan Merey and Ecuador’s Oriente edged down to $42.49/b and $43.11/b, respectively. They lost $2.67/b, or 5.9%, and $3.80, or 8.1%, respectively. As the Atlantic Basin supply glut continued to pressure price differentials for light sweet crude Basket components from West and North Africa, their values deteriorated further alongside crude benchmark Brent outright prices. Saharan Blend, Es Sider, Girassol, Bonny Light and Gabon’s Rabi values decreased by $3.91/b on average, or 8%, to $45.95/b. Physical crude differentials for these grades have been under pressure for several months as light sweet crude supplies surged. Despite an uplift in OSP offsets and support from healthy global sour markets, the 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 grade values deteriorated by $4.19/b for the month, or 8.6% to $44.69/b. Middle Eastern spot components, Murban and Qatar Marine, saw their values decline by $4.04/b, or 7.9%, to $47.06/b.
On 11 July, the ORB stood at $44.79/b.
The oil futures market
Oil futures in New York and London tumbled in June to become bearish, with ICE Brent settling below the $50/b mark for the first time this year on concerns that rising global supply will counter output adjustments from OPEC and non-OPEC participating producers. US crude inventories remained more than 100 mb above the five-year seasonal average. Oil futures have also dropped over the month due to concerns that persistent US production growth will translate into crude inventory builds, should seasonal refinery demand back off. Hedge funds have embarked on a new cycle of short-selling in Brent and WTI, which has added to downward pressure on prices. The wider oil complex faced a steep price decline over the month. This started early in the month with an EIA report showing a surprisingly large weekly stock build that helped create a bearish impression. At the same time, US gasoline demand took a turn to the downside just as the summer driving season started. A rebound in Libyan and Nigerian production added pressure to an already amply supplied Atlantic Basin due to a massive increase in US shale oil production, while demand from Asia was weaker on account of upcoming refinery maintenance and unfavourable arbitrage economics. The prospect of increased supply also put some pressure on prices. Nigerian Forcados production ramped up quickly after it resumed in May, increasing to 250 tb/d, creating an overhang as supply surpassed demand. Floating storage also increased amid continuing oversupply in the crude market. Volumes of oil stored at sea are increasing not only around Singapore, but also in the North Sea, with ship-tracking sources indicating a build-up of floating barrels of around 7 mb to 9 mb. Oil futures contracts lost around 7% for the quarter on both sides of the Atlantic.
Towards the end of the month, oil futures recovered slightly amid tightening supply and indications that OPEC and non-OPEC output adjustments adjustment was helping to rebalance the market. Some support for crude prices came from a tighter North Sea market. Demand from Chinese independent refiners for North Sea crudes firmed while floating stocks fell to around 6 mb from 9 mb in this region at the start of the month. August loading of North Sea Light will fall to a three-year low owing to field maintenance, and shipments of other North Sea grades will also decline.
ICE Brent ended June $3.85, or 7.5% lower, to stand at $47.55/b on a monthly average basis, while NYMEX WTI slipped $3.34, or 6.9%, to $45.20/b. Y-t-d, ICE Brent is $11.47, or 27.8% higher at $52.68/b, while NYMEX WTI increased by $10.17, or 25.6%, to $49.95/b.
Crude oil futures prices improved in the second week of July. On 11 July, ICE Brent stood at $47.52/b and NYMEX WTI at $45.04/b.
Bearish, or short, bets on crude oil prices have exploded further in June. In the US crude market, the short position held by money managers doubled in just two months to the equivalent of nearly 180 mb, while in the Brent market investors are sitting on a record short position of near 177 mb.
Fund managers have added 80 mb of extra short positions in WTI and 65 mb in Brent since 30 May, according to data from regulators and exchanges. Nevertheless, hedge fund long positions still outnumbered short positions by a ratio of 2.11.9 to 1, but this was one of the lowest ratios recorded in recent years. The risk of a short-covering rally when fund managers attempt to lock in profit has increased significantly. And with relatively few long positions left to close, the downside threat from further liquidation has been reduced. All in all, money managers cut their net combined futures and options positions in US crude by 72,497 contracts or 35% to 133,606 lots in the four weeks to 27 June, the lowest level since late September, data from the US Commodity Futures Trading Commission (CFTC) showed. Similarly, speculators lowered net long positions by 149,676 contracts, or 43%, to 200,204 lots in ICE Brent futures and options. The total futures and options open interest volume in the two exchanges was down 0.5% at 5.66 million contracts, and the net length positions share decreased to 5.9% from 9.8%.
The daily average traded volume for NYMEX WTI contracts surged further by 73,267 lots, or 5.9%, to 1,324,482 contracts, while that of ICE Brent was 43,709 contracts higher, up by 5.9% at 1,131,272 lots. Daily aggregate traded volume for both crude oil futures markets increased by 116,976 contracts to 2.46 million futures contracts, or near 2.5 bb/d of crude oil. Total traded volume NYMEX WTI and ICE Bent futures in June were significantly higher again at 29.14 and 24.89 million contracts, respectively.
The futures market structure
The contango structure widened marginally in the Brent and Dubai markets on ample supply in Europe and somewhat slower demand in Asia. However, the earlier 2H17 built up backwardation of the forward market structure has flipped into contango for the entire futures curve for both NYMEX WTI and ICE Brent, and the once-expected return of oil market balance during the 2H17 has now been pushed back beyond 1H18. The market structure has been pressured by rising supplies of light sweet crude and persistently high inventories. A build-up of crude in floating storage in the North Sea, driven by low European and Asia Pacific demand and a rise in the availability of competing light sweet grades from Africa, pressured Brent. Adequate supplies and slower Chinese demand, as independent refiners have bought limited crudes for the past two months, has also caused a glut in Asia. Meanwhile, consecutive weeks of crude inventory draws and higher refinery runs in the US supported easing of the WTI contango.
The Dubai M1 45 Cent /b discount to M3 increased to 60 Cent /b. The North Sea Brent M1/M3 discount also widened to 60 Cent /b on average from around 55 Cent /b the previous month. In the US, the WTI contango eased 14 Cent /b as WTI’s (M1-M3) narrowed further to 45 Cent /b.
The ICE Brent/NYMEX WTI spread narrowed on successive weeks of US crude stock draws. Ample light sweet crudes supplies from increasing production in Libya and Nigeria as well as floating storage in the Atlantic Basin has pressured the European benchmark relative to that of the US. The first-month ICE Brent/NYMEX WTI spread narrowed to $2.36/b, a 50¢/b contraction. This tighter spread between European Brent and US futures since the end of May has also weakened demand for US crude from Asian refiners.
The light sweet/medium sour crude spread
The sweet/sour narrowing differentials trend that began earlier in the year eased in the USGC and Asia. However, sour crudes continued strengthening relative to sweet in the European market as OPEC and non-OPEC supply adjustments limited the availability of sour grades, while increasing production in the US and the Atlantic Basin created a supply glut of light sweet crude.
In Asia, Tapis premium over Dubai increased marginally for the first time since the beginning of the year. The spread widened on healthy demand for Asia Pacific light sweet crudes amid firm refining margins in Asia and late-in-the-month returning regional demand from Chinese independent refiners, which have recently been granted a second batch of import quotas. Meanwhile, the Middle East sour crude benchmark weakened as ample supplies weighed on the market. Unsold supplies from the previous month and lower demand from China were depressing their values this month. Almost 10% of China's refining capacity is set to be shut down during the third quarter. Prices were also pressured down by supplies in storage and geopolitical tension in the region, which could harm the loading schedule. The Tapis/Dubai spread widened by 22 Cent to $2.01/b in June. The Dated Brent/Dubai spread remained almost unchanged, improving by only 6 Cent to the advantage of Brent, a 4 Cent premium compared with the previous month’s three-year low of a 2Cent discount.
In Europe, the light sweet North Sea Brent premium to Urals medium sour crude decreased by 50 Cent to 90 Cent. Urals price differentials to Dated Brent strengthened in the Mediterranean amid limited exports of Urals and higher demand for medium sour crude oil. Urals margins also remained remarkable at around $6.50/b on complex refineries in the Mediterranean. Meanwhile, strong fuel oil margins and tighter supplies of medium and heavy sour crude supported demand for medium and heavy Atlantic Basin crudes such as Urals. On the other hand, North Sea light sweet Brent was pressured on plentiful supply. An increasing supply of light, sweet crude from Libya and Nigeria and offers of North Sea crude from floating storage amid limited demand from Asia for North Sea crude have been weighing on Brent prices.
In the USGC, the Light Louisiana Sweet (LLS) premium over medium sour Mars widened slightly from its narrowest level since April 2015 to $3.26/b. Meanwhile, physical crude prices on the USGC were mostly stable, even as Tropical Storm Cindy threatened to bring heavy rain and winds to production facilities along the coast. Nevertheless, since the beginning of the year, sour crudes continued to firm on increased demand for export and USGC refinery demand due to less availability of Middle East sour crudes. High USGC sour crude prices helped draw in alternative Latin American cargoes as reduced Middle East sour crude exports boosted interest in alternatives.