The OPEC Reference Basket (ORB) increased by about 8% for the third consecutive month in September
to reach $53.44/b, its highest value since July 2015.The ORB also ended 3Q17 higher at about $50/b, while
its year-to-date (y-t-d) value rebounded to above the $50/b level. Oil prices found major support from
improving market fundamentals, particularly as related to oil market rebalancing with OPEC and
participating non-OPEC oil producers continuing to successfully drain the oil market of excess barrels as
demonstrated by a voluntary conformity level with production adjustments that has surpassed 100% so far.
The physical crude oil market was also very strong over the month. Y-t-d, the ORB’s value was 30.1%, or
$11.59 higher, at $50.13/b.
Month-on-month (m-o-m), oil futures surged further in September, with ICE Brent gaining more than 7% and
averaging above $55/b, supported by increasing evidence that the oil market is heading toward rebalancing,
geopolitical tensions in Iraq’s Kurdistan region and lower distillate stocks ahead of the winter season.
ICE Brent ended $3.64, or 7%, higher, to stand at $55.51/b on a monthly average basis, while NYMEX WTI
increased $1.82, or 3.8%, to $49.88/b. Y-t-d, ICE Brent is $9.33, or 21.6%, higher at $52.51/b, while
NYMEX WTI rose by $7.84, or 18.9%, to $49.36/b.
The ICE Brent/NYMEX WTI spread widened significantly to reach its widest level since August 2015,
making US crude the most attractive grades for arbitrage into both Europe and Asia. Hurricane damage to
US refineries hit demand for WTI and pressured prices, while Brent prices were boosted by OPEC and
non-OPEC output adjustments, maintenance to North Sea oil fields and strengthening demand in Europe.
The spread widened to $5.64/b m-o-m, a $1.83, or 48%, expansion.
The surge in oil prices attracted fresh speculative length in September. Hedge funds have become strongly
bullish on the outlook for all parts of the petroleum complex. Hedge funds and other money managers raised
their combined net long position in futures and options linked to ICE Brent and NYMEX WTI by
196,579 contracts, about 197 mb of crude oil, over the month to the week ending 26 September.
Since last month, the front end of the Brent crude contract curve flipped into backwardation through
December 2019, reflecting tighter supplies and strong refinery demand. In contrast, the WTI contango
worsened, which continues to signal large oversupply. Hurricane Harvey exacerbated the excess of
US domestic supply. The Dubai market structure was in backwardation, causing differentials for Middle
Eastern crudes to reach their highest premiums in months.
Sweet/sour differentials in Asia and Europe widened significantly, as light sweet Brent outright prices
improved markedly compared to sour grades. In the US Gulf Coast (USGC), the spread remained almost
unchanged for the second consecutive month at $3.11/b. The Tapis/Dubai, Brent/Dubai and Brent/Urals
spreads widened to $4.76/b, $2.56/b and $1.18/b, respectively.
OPEC Reference Basket
The ORB monthly and y-t-d values rebounded to above $50/b in September. The ORB increased sharply for
the third consecutive month, jumping a hefty 8% to reach its highest value since June 2015 and nearing the
$55/b level. The ORB also ended 3Q17 higher at about $50/b.
Oil prices rose steeply in September amid major support from improving market fundamentals, particularly as
relates to the oil market rebalancing as OPEC and key non-OPEC oil producers continue to successfully
drain the oil market of excess barrels as demonstrated by a more than 100% conformity level so far with their
voluntary production adjustments this year. Supporting this surge in oil prices was heightened geopolitical
risk as Turkey threatened to cut oil flows from Iraq's Kurdistan region toward its ports, putting more pressure
on the Kurdish region over its independence referendum. Prices also rose on tightening US distillate stocks
as its supplies contracted while exports continue to be robust. Physical crude oil differentials also showed a
noticeable improvement due to strong demand, firm refining margins and tight supplies.
In addition to seasonal refined products demand, unplanned refinery shutdowns in Europe and the USGC
have helped refining margins globally. Oil field maintenance as well as the ongoing lower supply of sour
crudes, particularly in Asia and Europe, due to the OPEC and non-OPEC production adjustment, has
underpinned physical crude oil values. Oil price gains have also been supported by anticipated demand from
US refiners resuming operations after shutdowns due to Hurricane Harvey.
Nevertheless, the market was also under pressure from a build in US oil inventories resulting from lower
refinery runs on the USGC due to the shutdown of several refineries when Hurricane Harvey hit.
M-o-m, the ORB value rose $3.84, or 7.7%, to settle at $53.44/b on a monthly average basis. For
3Q17, the ORB was 3.1%, or $1.50, higher at $49.98/b. Compared to the previous year, the ORB
value was 30.1%, or $11.59, higher at $50.13/b.
ORB component values improved along withrelevant crude oil benchmarks and monthly changes in their respective OSP differentials. A healthy physical market, particularly in the North Sea, also supported ORB components linked
to Brent. Crude oil physical benchmarks, namely Dated Brent, Dubai and WTI spot prices, increased
by $4.41/b, $3.27/b and $1.68/b, respectively.
The uplift in the Brent crude benchmark along with elevated price differentials supported light sweet
crude Basket components from West and North Africa, boosting prices sizably to above $55/b.
Saharan Blend, Es Sider, Girassol, Bonny Light, Equatorial Guinea’s Zafiro and Gabon’s Rabi values
increased by $4.74 on average, or 9.2%, to $56.07/b. Physical crude price differentials for these grades
remain high, on higher demand from Asia, particularly China and India. Booming refinery profits are helping
West African oil producers to sell cargoes at higher values, aided by a shortage in certain types of crude
amid the OPEC and non-OPEC producing countries’ voluntary production adjustments and geopolitical
disturbances. Nevertheless, sales from storage, spurred on by a flat forward structure in Brent prices,
capped West African crude price differentials.
Latin American ORB components Venezuelan Merey and Ecuador’s Oriente edged up to $49.13/b and
$51.30/b, gaining $3.75, or 8.3%, and $3.85, or 8.1%, respectively. Tight sour crude supplies in the USGC
and high exports continue to support these grades, despite the shutdown of several heavy conversion
refineries on the USGC.
Buoyed again by the uplift in OSP offsets and support from healthy Asian demand as they prepared to ramp
up heating oil production for peak winter demand in the northern hemisphere, the value of multiple-region
destination grades Arab Light, Basrah Light, Iran Heavy and Kuwait Export improved further. On average,
these grade values expanded by $3.63 for the month, or 7.4%, to $52.71/b.
Middle Eastern spot components, Murban and Qatar Marine, saw their values improve by $3.43, or 6.7%,
to $54.94/b and $3.20, or 6.4%, to $52.91/b, respectively. Spot premiums for Middle East crude for year-end
loading have hit multi-month highs, spurred on by robust demand in Asia. Asian buyers snapped up spot
cargoes this month after Saudi Aramco and the Abu Dhabi National Oil Company lowered supplies and as
they both prepared to ramp up heating oil production for peak winter demand.
On 10 October, the ORB stood at $54.23/b, 79? above the September average.
The oil futures market
Oil futures surged further in September, with ICE Brent gaining more than 7% and averaging above the
$55/b level, supported greatly by increasing evidence that the oil market is heading toward rebalancing,
geopolitical tensions in Iraq’s Kurdistan region and lower distillate stocks ahead of the winter season.
Earlier in the month, US oil futures edged higher as oil refineries and pipelines in the USGC slowly resumed
activity as damage by Hurricane Harvey to the oil infrastructure in the USGC appeared less extensive than
some had feared. Prices were also supported by a rally in the oil product markets, with US gasoline futures
hitting a two-year high above $2/gal, buoyed by fears of a fuel shortage just days ahead of the Labour Day
weekend that typically brings a surge in driving. Hurricane Harvey, which brought record flooding to the US
oil heartland of Texas, had paralysed at least 4.4 mb/d of refining capacity.
Oil prices rose further as strong global refining margins and the reopening of USGC refineries provided a
more bullish outlook after sharp drops due to the hurricane. A few days later, crude oil futures tumbled on
worries that energy demand would be hit hard as Hurricane Irma, the second major hurricane to approach
the US in two weeks, one of the most powerful storms in a century, headed toward Florida and the
Southeast. Oil prices rebounded with Brent closing at a five-month high, as the dollar weakened and after a
string of reports forecast the market would tighten further as fuel demand increased.
Oil prices further improved despite a rise in US crude inventories, with the market heading for its largest
third-quarter gain in 13 years after news that OPEC and non-OPEC producers were considering extending
output adjustments. OPEC, Russia and several other oil producers have adjusted production by about
1.8 mb/d since the start of 2017, helping lift oil prices by about 15% in the past three months. In subsequent
days, oil prices soared after major producers said the global market was on its way to rebalancing, while
Turkey threatened to cut oil pipeline flows from Iraq's Kurdistan region toward its ports.
Toward the end of the month, oil prices ended lower after investors took profits following a rally to 26-month
highs, but on average, oil prices closed the month up.
ICE Brent ended September $3.64, or 7.0% higher, to stand at $55.51/b on a monthly average basis, while
NYMEX WTI increased $1.82, or 3.8%, to $49.88/b. Y-t-d, ICE Brent is $9.33, or 21.6%, higher at $52.51/b,
while NYMEX WTI rose by $7.84, or 18.9%, to $49.36/b.
Crude oil futures prices improved in the second week of September. On 10 October, ICE Brent stood at
$56.61/b and NYMEX WTI at $50.92/b.
The boost in oil prices attracted fresh speculative length in September. Hedge funds have become strongly
bullish on the outlook for all parts of the petroleum complex, amid signs that global crude stocks are declining
and fuels will be in short supply after hurricane-related refinery outages. But with so many fund managers
already betting heavily on a further rise in prices, the market has become disproportionate, and the risk of a
sharp reversal has increased significantly.
Hedge funds and other money managers raised their combined net long positions in futures and
options linked to ICE Brent and NYMEX WTI by 196,579 contracts, about 197 mb of crude oil, over the
month to the week ending 26 September. Fund managers have amassed net long positions amounting to
760,433 lots, or 760 mb of oil, in a clear sign of returning confidence.
The net long positions in Brent rose by 92,094 contracts to 508,645 lots, or 509 mb of oil, the highest level in
six months, according the US Commodity Futures Trading Commission (CFTC) and ICE data. Meanwhile,
net long positions in WTI increased by 104,485 contracts to 251,788 lots. Hedge fund positioning in Brent
and especially WTI is less lopsided, with net positions and ratios in both crudes well below the peaks set
earlier this year. The total futures and options open interest volume in the two exchanges was also up 8.6%
at 6.16 million contracts.
The daily average traded volume for NYMEX WTI contracts dropped by 131,254 lots, or 8.7%, to
1,378,549 contracts, while that of ICE Brent was just 2,499 contracts higher, up by 0.3% at 944,497 lots.
Daily aggregate traded volume for both crude oil futures markets decreased by 128,756 contracts to
2.32 million futures contracts, or about 2.3 billion b/d of crude oil. Total traded volume NYMEX WTI and
ICE Brent futures in September was lower at 27.57 million and 19.83 million contracts, respectively, due to
shorter days of trading over the month compared to the previous month.
The futures market structure
Since last month, the front end of the Brent crude contract curve has flipped into backwardation, where
prices in the near term are more expensive than those further out, while US crude futures remain in a
contango, where near-term supplies are cheaper, through next year.
Global marker Brent's backwardation extended past close-by months to contracts through
December 2021, reflecting tighter supplies due to the supply adjustments by OPEC and non-OPEC
producers as also more West African crude moving to Asia and floating storage disappeared. Strong
refinery demand both in Europe and Asia has helped clear up an overhang of oil that was stored
at sea when the structure of the physical forward market was in a contango. Meanwhile, unplanned
global production outages, which were at a fivemonth high of 1.85 mb/d in September, up from a
multi-year low in July, is helping to strengthen backwardation in the Brent forward curve. Several
of the supply disruptions are set to extend through to year-end, when refinery runs will pick up amid
exceptionally higher margins and new capacity starting in China, so the strength in physical grades
will persist. This backwardation will help drain inventories at a faster rate in the months ahead.
In contrast, the WTI contango worsened, which continues to signal large oversupply. Hurricane
Harvey exacerbated excess US domestic supply by forcing the closure of nearly 25% of US refining
capacity and half a dozen USGC ports and pipelines earlier in the month. At the US storage hub of Cushing, Oklahoma, the delivery point of the WTI contract, inventories are still near seasonal highs at
almost 60 mb. During the height of summer demand, stocks fell by around 2.5 mb per month, but those
stocks will need to fall faster to allow a switch to backwardation.
The Dubai market structure was in backwardation over most of August and September, during which period
differentials for some Middle Eastern crudes reached their highest premiums against Dubai in months, which
suggests that refiners drew down some of the massive stocks they had built up. The backwardation in the
Dubai markets enticed further commercial refinery crude stock draws in China, a trend that has continued in
The Dubai M1 cent/b discount to M3 flipped into a premium of 24cent/b, improving 32cent. The North Sea Brent
M1/M3 30cent backwardation strengthened to cent/b, a cent improvement. In the US, the WTI contango
worsened by cent as WTI’s (M1-M3) widened to cent/b.
The NYMEX WTI crude front month discount to the same month of ICE Brent futures fell to $5.64/b, its
lowest since August 2015, making US crude the most attractive grade for arbitrage into both Europe and
Asia. Hurricane damage to US refineries hit demand for WTI and pressured prices, while Brent prices were
boosted by OPEC and non-OPEC producers’ output adjustments, maintenance to North Sea oil fields and
strengthening demand in Europe for distillates. With this large gap in the price of a barrel of US WTI crude
and Brent, the international benchmark, US oil exports rose to an all-time high of 1.98 mb/d in the last week
of September, surpassing the previous record of nearly 1.5 mb/d that was seen during the previous week.
This has also created an opportunity for USGC condensate, such as Eagle Ford, to find its way into the
Asian market. This increasing arrival of arbitrage crude is set to put significant pressure on locally-sourced grades. The first-month ICE Brent/NYMEX WTI spread widened to $5.64/b in September, a $1.83, or 48%, expansion.
The light sweet/medium sour crude spread
The sweet/sour differentials in Asia and Europe widened significantly in all markets, as outright prices from
light sweet Brent improved markedly compared to sour grades. In the USGC, the spread remained
unchanged for the second consecutive month.
In Asia, the Tapis premium over Dubai increased for the fourth month in a row, despite ongoing lower sour
crudes supplies. The spread widened as the Brent/Dubai spread increased further to climb above $2.50/b,
which further slowed the west-east arbitrage movement for Atlantic Basin crudes. This made the domestic
Asian grade more attractive despite the arbitrage flows of light sweet and condensate barrels from the USGC
to Asia. The lack of arbitrage flows from the northern Atlantic Basin helped Asian-sourced grades perform
well on the spot market as refiners increased their intake. Higher crude differentials for West African crudes
also made them less attractive to Asian buyers. Moreover, the continuing healthy demand for Asia Pacific
light sweet crudes amid firm refining margins in Asia and the brief requirement for refined products to export
to the US as a result of Hurricane Harvey supported the trend. Condensate pricing also firmed on steady
demand coupled with supply issues. The shorter supply picture came from news that the Iranian South Pars
field has to undergo unplanned maintenance in October as well as less Qatari condensate being offered in
recent months. This has created an opportunity for USGC condensate, such as Eagle Ford, to find its way
into the Asian market.
The Tapis/Dubai spread widened by $1.32 to $4.76/b. The Dated Brent/Dubai spread widened, improving by
$1.40 to the advantage of Brent, at a $2.56/b premium compared with the previous month’s $1.42/b
In Europe, the light sweet North Sea Brent premium to Urals medium sour crude increased sharply by 82¢ to $1.18/b, strongly revising the twoyear low premium of the previous month. Urals
price differentials to sour crude in the Atlantic Basin were marked by the strength of physical Brent.
A considerable decrease in floating storage in the North Sea and healthy margins fuelled higher
refinery intake. Furthermore, the sweet-sour spread widened as Urals differentials underwent a
significant downward correction after having almost reached parity against Dated Brent. This improved
the incentive to process the Russian medium, sour grade, especially for European and Asian refiners,
but the wider Brent/Dubai spread is set to limit the ability of arbitrage into Asia.
In the USGC, the Light Louisiana Sweet (LLS) premium over medium sour Mars remained almost
unchanged at $3.11/b. Meanwhile, USGC crude price differentials to WTI rose sharply after Brent's premium
widened over WTI, with sour grades such as Mars trading at a premium to WTI. Strong exports were also a
driving factor for the increase in certain USGC grades. Additional support for Mars also came from
production disruptions, with BP having closed its Thunder Horse platform, just as some relief was expected
to come from the restart of the 375 tb/d Zydeco pipeline. This follows hurricane-related disruptions earlier in
Impact of US dollar and inflation on oil prices
On average, the US dollar (USD) generally declined at the beginning of the month, as expectations for
interest rate hikes by the US Federal Reserve were lower on uncertainties surrounding the potential
economic impact of Hurricanes Harvey and Irma and those around the Korean peninsula. However, interest
rate expectations were adjusted upward in the second half of September as those earlier concerns receded.
Furthermore, the US Federal Reserve left the door open for an additional rate hike this year. These
developments translated into strengthening of the US dollar. This trend continued at the beginning of
October, helped by expectations of higher US growth related to tax reform proposals unveiled at the end of
the month of September by the US government. On average, the dollar dropped by 0.9% m-o-m against the
euro, but the trend of depreciation reversed, reflecting overall dollar strength towards the end of the month
and the uncertainties surrounding the Catalonian government push for independence. The dollar was lower
on average by 0.3% against the Swiss franc. It also lost 2.6% against its Canadian counterpart, due to the
impact of the second-consecutive interest rate increase by the Bank of Canada in September. The dollar was
down by 2.7% m-o-m against the pound sterling as Bank of England officials suggested their willingness to
increase interest rates this year. However, the dollar advanced on the Japanese yen on average by 0.7%
However, the US dollar declined by 1.7% against Chinese yuan on average in August, though the
majority of losses were reversed towards the end of the month on top of dollar strengthening. The dollar
advanced by 0.7% m-o-m against the Indian rupee, but it recently weakened against it after the Reserve Bank of India left interest unchanged at the beginning of October. The dollar declined
against commodity exporters’ currencies; for example, by 0.5% m-o-m against the Brazilian real
and 3.2% against the Russian rubble, mainly due to strengthening petroleum prices. The US dollar was
stable during the month in relation to the Mexican peso.
In nominal terms, the price of the OPEC Reference Basket (ORB) increased by $3.84, or 7.7%, from
$49.60/b in August to $53.44/b in September. In real terms, after accounting for inflation and
currency fluctuations, the ORB increased to $34.66/b in September from $32.60/b (base June 2001=100) the previous month. Over the same period, the US dollar declined by 0.8% against the import-weighted modified Geneva I + US dollar basket*, while inflation was flat.