The OPEC Reference Basket (ORB) recovered in July to $46.93/b, up almost 4% on bullish market fundamentals after two consecutive months of sharp declines. The oil complex rebounded on receding fears of oversupply as solid seasonal demand soaked up some of what is seen as a glut on the market. Oil prices rose nearly 10% after the last meeting of OPEC and major non-OPEC producers, including Russia, when the group discussed potential measures to balance the oil market. Y-t-d, the ORB’s value was 33.7% higher or $12.55, at $49.75/b.
Oil futures recovered m-o-m, ending July above $50/b. Prices improved as OPEC and non-OPEC countries continued to comply with pledged output adjustments and US stocks declined further, providing more evidence of global destocking. Bullish product demand, a fluctuation in Nigerian production, weakness in the US dollar, healthy refining margins and improved perceptions of solid end-user demand, as well as encouraging economic indications regarding China provided further support to crude prices. Short covering also contributed to the rally in oil futures. ICE Brent ended July $1.59, or 3.4%, higher at $49.15/b, while NYMEX WTI increased by $1.48 or 3.3%, to stand at $46.68/b. Y-t-d, ICE Brent is $10.23, or 24.4%, higher at $52.18/b, while NYMEX WTI increased by $9.03, or 22.3%, to $49.50/b.
The ICE Brent/NYMEX WTI spread widened despite successive weeks of US crude stock draws. This somewhat helped US exports. Improvement of fundamentals and the clearing of floating storage in the North Sea supported the Brent market. The Brent-WTI spread widened to $2.47/b in July, representing a 12¢ expansion over June.
In July, short covering, rather than long building, has driven oil prices higher, which suggests fund managers are becoming less bearish about prices rather than more bullish. Hedge funds reduced combined short positions in Brent and WTI crude futures and options contracts by 163 mb, according to data published by regulators and exchanges.
The contango structure narrowed in all markets, verging on sustained backwardation, as the oil glut started to ease. This removed the financial incentive for traders to store barrels, a factor likely contributing to the drawdown of stocks witnessed during the month.
Sweet/sour differentials were mixed in July, widening significantly in Asia, while narrowing in Europe on tighter sour supplies. In Europe, the light sweet North Sea Brent premium to Urals medium sour crude decreased again by 21¢ to 69¢, a two-year high on firm demand for sour crudes.
OPEC Reference Basket
The ORB recovered on bullish market fundamentals in July after two consecutive months of sharp declines. It was up almost 4% m-o-m but y-t-d was slightly below $50/b y-t-d, for the first time this year. The oil complex rebounded on receding fears of oversupply as solid seasonal demand soaked up some of what is seen as a glut on the market. Bullish inventory reports over the month helped confirm the declining trajectory of global inventories. Chinese oil imports in the first half of this year were up almost 14% from the same period in 2016, helping to drain the global fuel glut. US crude oil inventories have fallen by more than 10% from March peaks to 475.4 mb. Drilling for new production in the US is also slowing, with just 10 rigs added in July, the fewest of any month since May 2016. Oil prices have risen nearly 10% since the last meeting of OPEC and non-OPEC major producers, including Russia, when the group discussed potential measures to balance oil markets. Prices were also lifted by short covering.
M-o-m the ORB value rose by $1.72 to settle at $46.93/b, up 3.8%. Compared with the previous year, the ORB value was 33.7% or $12.55 higher at $49.75/b.
ORB component values improved along with relevant crude oil benchmarks and monthly changes in respective official selling price (OSP) differentials. Physical crude oil benchmarks, namely Dated Brent, WTI and Dubai spot prices, increased in July by $2.09/b, $1.50/b and $1.21/b, m-o-m, respectively.
Latin American ORB component Venezuelan Merey edged up 92¢, or 2.2%, to $43.41/b in July. Ecuador’s Oriente also rose by $2.10, or 4.9%, to $45.21/b. Amid improving price differentials for light sweet crude Basket components from West and North Africa, values improved alongside crude benchmark Brent outright prices. Saharan Blend, Es Sider, Girassol, Bonny Light, Equatorial Guinea’s Zafiro and Gabon’s Rabi values increased by $2.06/b on average, or 4.5%, to $48.01/b. Physical crude differentials for these grades were firm on higher demand from China and turbulence in supplies. Booming refinery profits are helping West African oil producers sell cargoes at higher values, aided by a shortage in certain types of crude amid OPEC production adjustments and geopolitical turbulence. The value of multiple-region destination grades Arab Light, Basrah Light, Iran Heavy and Kuwait Export rebounded, supported further by an uplift in OSP offsets and support from healthy global sour markets. On average, values for these grade expanded by $1.75/b for the month, or 3.9%, to $46.44/b. Middle Eastern spot components Murban and Qatar Marine saw values improve by $1.18/b, or 2.5%, to $48.24/b.
On 9 August, the ORB stood at $50.47/b, over $3.54 above the July average.
The oil futures market
Oil futures in New York and London recovered in July, with both ending the month above $50/b, supported by falling inventories, higher demand and stronger refining margins. Prices improved as OPEC and nonOPEC countries continued to comply with output adjustments and US stocks declined further, providing more evidence of global destocking. OPEC producers participating in the November in the November Ministerial decision successfully implemented 100% of the planned output adjustments in the six months from January to June. US commercial crude stocks fell for four consecutive weeks in July owing to high refinery runs. Crude oil inventories have dropped by 56 mb since 1Q17, with around 24% of the draw taking place at the WTI futures delivery point of Cushing, Oklahoma, where stocks are at their lowest in 20 months. Firming fundamentals are also drawing crude from floating storage in the Atlantic Basin. Bullish product demand supported the overall oil complex, as US gasoline futures made a significant gain over the month, providing further support to crude prices. Short covering in the September contract also contributed to the rally in oil futures. Price support has also come from a fall in Nigerian production of about 150 tb/d after a disruption in the Trans Niger pipeline and indications that some US producers are adjusting their spending plans. July saw some additional weakness in the US dollar, ongoing strengthening in refining margins and improved perceptions of solid end-user demand, as well as encouraging economic indications regarding China via rising copper prices. The US dollar index is currently at its lowest level since June of last year. Drilling for new production in the US is also slowing down, with just 10 rigs added in July, the fewest of any month since May 2016.
ICE Brent ended July $1.59, or 3.4% higher, to stand at $49.15/b on a monthly average basis, while NYMEX WTI increased by $1.48, or 3.3%, to $46.68/b. Y-t-d, ICE Brent was $10.23, or 24.4% higher, at $52.18/b, while NYMEX WTI rose by $9.03, or 22.3%, to $49.50/b.
Crude oil futures prices improved in the second week of August. On 9 August, ICE Brent stood at $52.70/b and NYMEX WTI at $49.56/b.
Short covering in July, rather than long building, drove oil prices higher, which suggests fund managers are becoming less bearish about prices rather than more bullish. Hedge funds reduced their aggregate short positions in Brent and WTI crude futures and options contracts by 163 mb, according to data published by regulators and exchanges. Hedge funds had short positions equalling 195 mb on 25 July, down from a record 358 mb on 27 June. In contrast, total long positions increased by only 30 mb over the same period. All in all, money managers raised their net combined futures and options positions in US crude by 104,895 contracts, or 78%, to 238,501 lots in the four weeks to 25 July, data from the US Commodity Futures Trading Commission (CFTC) showed. Similarly, speculators increased net long positions by 88,367 contracts, or 44%, to 288,571 lots in ICE Brent futures and options. Total futures and options open interest volume in the two exchanges was also up by 0.5% at 5.69 million contracts, and the net length positions share increased to 9.3% in July from 5.9% in June.
The daily average traded volume for NYMEX WTI contracts surged further by 26,423 lots, or 4.3%, to 1,380,905 contracts, while that of ICE Brent was 278,916 contracts lower, down by 24.7% at 852,356 lots. Daily aggregate traded volume for both crude oil futures markets decreased by 222,494 contracts to 2.23 million futures contracts, or near 2.2 billion b/d of crude oil. In July, total traded volume for NYMEX WTI futures were higher at 27.62 million contracts, while ICE Brent futures total trade volumes were significantly lower at 17.90 million contracts.
The futures market structure
The contango structure narrowed in all markets, verging on sustained backwardation, as the oil glut started to ease. The narrowing contango removed the financial incentive for traders to store barrels, a factor likely contributing to the drawdown of stocks witnessed during the month. Further declines in US crude stocks are likely, given the record rates at which US refineries are running, while gasoline demand sparked into life after a sluggish first quarter. Refinery throughput rose by 123 tb/d to 17.41 mb/d in the week ending 28 July, the second-highest figure on record, according to the US Energy Information Administration (EIA). Gasoline product supplies rose w-o-w to 9.84 mb/d, also the second-highest level on record. This shift in the oil complex momentum came after OPEC officials indicated they would move their focus to limiting exports. The entire forward curve has flattened for Brent, amid some bullish indicators in the physical market. Crude differentials strengthened notably for a range of key grades in the Mediterranean, North Sea and West African markets. A tighter Atlantic Basin could present more export possibilities for US crude producers who already have their eyes trained on global markets, given the premium that Brent and Dubai enjoy over WTI.
The Dubai M1 59 cent /b discount to M3 decreased to 52 cent /b. The North Sea Brent M1/M3 discount also narrowed to 40 cent /b on average from around 60cent /b the previous month. In the US, the WTI contango eased by 11cent /b as WTI’s (M1–M3) narrowed further to 34cent/b.
The ICE Brent/NYMEX WTI spread widened despite successive weeks of US crude stock draws. Tightening fundamentals and the clearing of floating storage in the North Sea supported the Brent market. This somewhat wider spread, coupled by recent multiyear strength in the European sour market, has potentially opened up arbitrage to send competing US medium sour grades such as Mars and Southern Green Canyon into Europe. It is clear that the global medium heavy sour crude market has tightened and that US sour exports have already gained market share in Asia. The first-month ICE Brent/NYMEX WTI spread widened to $2.47/b, a 12 cent /b expansion.
The light sweet/medium sour crude spread
Sweet/sour differentials were mixed in July, widening significantly in Asia, while narrowing in Europe on tighter sour supplies.
In Asia, the Tapis premium over Dubai increased for the second month in a row, despite a tighter sour market. A near $1/b widening in the Brent/Dubai spread slowed the west-east arbitrage movement for Atlantic Basin crudes. Lower supplies of Vietnamese sweet crudes also supported the Asia Pacific light sweet oil market. Moreover, continuing healthy demand for Asia Pacific light sweet crudes amid firm refining margins in Asia and returning regional demand from Chinese independent refiners, supported the trend. The Tapis/Dubai spread widened by 91¢ to $2.92/b in July. The Dated Brent/Dubai spread widened, improving by 88 cent to the advantage of Brent, a 92 cent premium compared with the previous month’s 4 cent premium.
In Europe, the light sweet North Sea Brent premium to Urals medium sour crude decreased again by 21cent to 69cent, a fresh two-year high on firm demand for sour crudes. Urals price differentials to Dated Brent strengthened in the Mediterranean amid limited exports of Urals and higher demand for medium sour crude oil. A steady flow of Urals to buyers in India boosted interest in the grade’s tight second-half July supplies. Meanwhile, strong fuel oil margins and tighter supplies of medium and heavy sour crude due to OPEC and non-OPEC production adjustments supported the market for medium and heavy Atlantic Basin crudes such as Urals.
On the US Gulf Coast (USGC), the Light Louisiana Sweet (LLS) premium over medium sour Mars narrowed to $3.17/b on increased demand from refiners for sour alternatives to OPEC supplies. Mars also found support from the shutdown of the 220 tb/d Cano Limo-Covenas pipeline, as well as higher prices for competing Colombian and Western Canadian Select (WCS) prices.