The OPEC Reference Basket averaged $55.50/b in October, gaining $2.06 over the previous month and reaching the highest value in more than two-and-a-half years, with a year-to-date average of $50.68/b. Throughout the month, prices were supported by rising global demand and expectations that OPEC and other participating non-OPEC producing countries would extend the agreement to adjust output and bring forward the oil market rebalance. OPEC and participating non-OPEC countries’ production adjustment conformity levels have remained over 100% for the first ten months into their 18-month agreement. The physical crude oil market was also very strong over the month, particularly for the Middle East crudes.
Crude futures also reached levels not seen since mid-2015. ICE Brent ended $2.13 higher at $57.65/b, while NYMEX WTI increased $1.72, reaching $51.59/b. Y-t-d, ICE Brent is $9.06, or 20.6% higher at $53.04/b, while NYMEX WTI rose by $7.23, or 17.1%, to $49.60/b. The ICE Brent/NYMEX WTI spread widened by 42¢ or 7.4% to $6.05/b, its widest since mid-2015, keeping US crude as the most attractive grades for arbitrage into both Europe and Asia. Higher Cushing stocks hit WTI and pressured prices, while Brent prices have been boosted by tighter supplies.
Hedge funds raised net long positions in NYMEX WTI futures and options by 29,456 contracts to 281,244 lots, the highest level since mid-April. In ICE Brent, money managers increased net long positions in futures and options by 21,592 contracts to 530,237 lots, the highest ever recorded.
Brent and Dubai remained in backwardation, while WTI contango eased. The sweet/sour differentials in Asia and Europe narrowed in all markets, amid tighter supplies and healthy demand for sour grades, while lighter grades came under pressure from arbitrage flows from the US.
OPEC Reference Basket
Amid continuing bullish oil market fundamentals, the ORB monthly value firmed above $55.50/b in October to its highest in almost two-and-a-half years. Throughout the month, prices have been bolstered by rising global demand and expectations that OPEC and other producing countries would extend a deal to adjust output. The ORB increased for the fourth consecutive month, improving by almost 4% to remain above the key $50/b, y-t-d.
Oil prices persisted in October as the ongoing bullish market sentiment due to improving market fundamentals, was fuelled further by indications from key OPEC Members, Russia and other exporters that they support extending the 1.8 mb/d production adjustment to rebalance the oil market. OPEC and the participating non-OPEC countries’ production adjustment conformity level remains over 100% for ten months into the 18-month Graph 1 - 1: Crude oil price movement agreement. The potential return of a geopolitical premium in the Middle East is also seen to support prices. Moreover, US crude stocks have continued to fall over the month as imports fell and exports surged, bringing the cumulative US crude stock draw to just under 10 mb in October. The draws are particularly impressive when compared with seasonal norms that show the five-year average US crude stock build for October at 16 mb and last year’s monthly build at 19.7 mb.
M-o-m, the ORB value rose $2.06, or 3.9%, to settle at $55.50/b on a monthly average. Compared to the previous year, the ORB value was 28%, or $11.23 higher, at $50.68/b.
ORB component values improved along with relevant crude oil benchmarks and monthly changes in their respective OSP differentials. A healthy physical market also supported ORB components, particularly Middle Eastern crudes. Crude oil physical benchmarks Dated Brent, WTI and Dubai spot prices increased by $1.21, $1.86 and $2.12, respectively.
The uplift in the Brent crude benchmark supported prices for light sweet crude Basket components from West and North Africa to remain above $55/b. Saharan Blend, Es Sider, Girassol, Bonny Light, Equatorial Guinea’s Zafiro and Gabon’s Rabi values increased on average by $1.30, or 2.3%, to $57.38/b. Nevertheless, physical crude price differentials for these grades were under pressure amid a build-up of excess cargoes due to weak Chinese demand. Trade was limited and some tenders that were expected to clear an overhang in November-loading Nigerian crude failed to do so. Asian refiners have increasingly been moving away from their usual diet, frequently opting for US crude oil as shown by Taiwan's latest tender. Differentials for Nigerian crude were also under pressure on low US refining demand and with Chinese refiners increasingly switching their slate to use more US crude over the last few months.
Latin American ORB components Venezuelan Merey and Ecuador’s Oriente edged up to $50.70/b and $53.77/b, respectively, gaining $1.57, or 3.2%, and $2.47, or 4.8%. Tight sour crudes supplies in the USGC amid considerably lower imports of heavy sour crudes from OPEC Member Countries continued to support these grades.
Buoyed again by the uplift in OSP offsets and support by 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 grades’ values expanded by $2.18, or 4.1%, for the month, to $54.89/b.
Middle Eastern spot components, Murban and Qatar Marine, saw their values improving by $2.45, or 4.5%, to $57.39/b and $2.23, or 4.2%, to $55.14/b, respectively. Spot premiums for Middle East crude for year-end loading have hit multi-month highs, spurred by robust demand in Asia. Asian buyers continued to snap up spot cargoes over the month after Saudi Aramco and Abu Dhabi National Oil Company lowered supplies, and as they both prepared to ramp up heating oil production for peak winter demand.
On 10 November, the ORB was up at $61.91/b, $6.41 above the October average.
The oil futures market
Oil futures improved further in October to levels not seen since summer 2015, with ICE Brent nearing $58/b and NYMEX WTI above $50/b. Both futures contracts continue to be supported by increasing evidence that the oil market is heading smoothly toward rebalancing, lower crude oil stocks, healthy demand and geopolitical tensions.
Earlier in the month, oil prices rose sharply as signs that Saudi Arabia and Russia would continue their production adjustment through next year pushed the US benchmark back above $50/b. in the following days, oil futures fell in one of the most bearish weeks in months to ending Brent crude's longest multi-week rally in 16 months as oversupply concerns reappeared with producers having started to hedge future drilling. By the end of the 1st decade of the month, oil prices again inched higher again, propped up by OPEC comments signalling the possibility of continued action to restore market balance in the long term.
Oil prices continued to rise, supported by comments from OPEC and trading companies that the market is rebalancing after years of oversupply. Oil prices increased even more as OPEC forecast higher demand for 2018, amid both US crude production and inventories declining, pointing towards a tightening market, and heightened tensions in Kurdistan. By mid-month, oil prices closed higher on bullish news from strong Chinese oil imports and geopolitical tensions in the Middle East.
Towards the end of the month, oil prices jumped sharply, with global benchmark Brent crude rising above $60/b, on support for extending the decision of the Declaration of Cooperation and as the dollar retreated from three-month peaks.
ICE Brent closed the month at its highest level since July 2015, above $60/b and NYMEX WTI closed at a peak not seen since February, near $55/b.
ICE Brent averaged October $2.13, or 3.8% higher, at $57.65/b, while NYMEX WTI increased $1.72, or 3.4%, to average $51.59/b. Y-t-d, ICE Brent is $9.25, or 21.1%, higher at $53.04/b, while NYMEX WTI rose by $7.49, or 17.8%, to $49.60/b.
Crude oil futures prices improved in the second week of November. On 10 November, ICE Brent stood at $63.52/b and NYMEX WTI at $56.74/b.
Hedge funds and money managers raised their bullish bets on crude oil prices to the highest in more than six months, exchange data showed at the end of October, as prices surged amid rising support to extend the OPEC and non-OPEC producing countries’ Declaration of Cooperation.
The speculator group raised its combined futures and options positions in NYMEX WTI by 29,456 contracts to 281,244 lots in the month of October, the CFTC said, the highest level since mid-April. Gross long positions among money managers on the NYMEX surged to the highest since mid-March at 387,488 contracts, data showed. Meanwhile, gross short positions fell to 106,244 lots.
Similarly, hedge funds and money managers raised their combined futures and options position ICE Brent by 21,592 contracts to 530,237 lots, according to ICE Exchange, the highest ever recorded. It should also be noted that speculative net length on Brent futures has increased through the period of rising prices since July. This makes it likely that the amount of money invested in rising prices over the last couple of weeks was at a high, surpassing previous peaks seen in 2014, prior to the major price declines, as well as earlier this year when net length was built up considerably around the time OPEC production adjustments kicked in.
The long- to- short ratio in ICE Brent speculative positions increased from 8.4 to 10.4, while that of NYMEX WTI remained at around 3.6. The total futures and options open interest volume in the two exchanges was also up 1.3% at 6.23 million contracts.
The daily average traded volume for NYMEX WTI contracts dropped by 240,804 lots, or 9.2%, to 1,137,745 contracts, while that of ICE Brent was just 25,841 contracts lower, down by 1.7% at 918,657 lots. Daily aggregate traded volume for both crude oil futures markets decreased by 266,645 contracts to 2.06 million futures contracts, or about 2.1 billion b/d of crude oil. Total traded volume in NYMEX WTI in October was lower at 25.03 million contracts, while ICE Bent it was higher at 20.21 million contracts.
The futures market structure
The Brent and Dubai backwardation structure firmed further this month as the market rebalancing process got underway, reflecting tighter supplies and lower global crude oil inventory levels, helping to unwind floating storage. This is greatly due to the production adjustments by OPEC and participating non-OPEC producers.
Brent futures first moved into backwardation in August and have been trading consistently in that structure since September. But the price structure in WTI, which normally follows Brent, albeit loosely, has disconnected since August.
The Dubai market structure has been in backwardation since August, signalling strong demand for spot cargoes. Differentials for some Middle Eastern crudes reached their highest premiums against Dubai in months. This sustained backwardation has enticed further commercial refinery crude stock draws in China, a trend that has continued since August. This steep backwardation in Dubai structure is pushing OSPs higher for all Middle Eastern crudes.
NYMEX WTI remained stuck in contango, which deepened when Hurricane Harvey stopped many US refineries processing crude and left the country with a build-up in crude stocks. However, US crude exports have been running at record rates since the middle of September, according to data from the EIA. Crude imports remained sluggish, falling to around 7.1 mb/d from almost 8 mb/d in August. At the same time, US refineries have been processing record seasonal volumes of crude to rebuild stocks of gasoline and especially diesel, depleted by the hurricane and strong demand at home and in export markets.As a result, crude stocks along the East, West and Gulf Coasts have all fallen faster since the summer and are well below last year’s levels.
In contrast to the coasts, however, the Midwest has reported a continued build-up in crude stocks, especially around Cushing, Oklahoma, the delivery point for the WTI futures contract. Cushing stocks have increased in 10 out of the last 11 weeks, by a total of more than 8 mb, according to the EIA, while, in the rest of the country, crude stocks have fallen in eight out of the last 11 weeks, by a total of almost 36 mb. Plentiful crude at Cushing has ensured that WTI prices for maturing futures contracts have continued to trade at a discount. But as refinery runs and exports empty coastal tank farms, the Midwest crude glut should gradually start to clear. WTI calendar spreads have also strengthened, and now seem to be gradually reconnecting with Brent, another sign that Cushing inventories may be peaking. WTI futures prices are still trading in a significant contango between December and February, but thereafter the contango becomes insignificant, and the market is in backwardation beyond April.
The North Sea Brent M1/M3 56cent/b backwardation strengthened to 59cent/b, up by 3cent. The Dubai M1 25cent/b premium to M3 doubled to 50cent/b, improving 25cent. In the US, the WTI contango decreased by 32cent as WTI’s (M1-M3) narrowed to 48cent/b.
The NYMEX WTI crude front-month discount to ICE Brent increased to $6.05/b, its largest since mid-2015, keeping US crude as the most attractive grade for arbitrage into both Europe and Asia. Higher Cushing stocks hit WTI and pressured prices, while Brent prices were boosted by tighter supplies due to the OPEC and non-OPEC output adjustment and higher demand amid favourable refining margins.
Asia is set to ramp up crude oil imports from the US in late 2017 and early next year. As many as 11 tankers, partly or fully laden with US crude, are due to arrive in Asia in November, with another 12 to load oil in the US later in October and November before sailing for Asia. Between November and January, very large volumes of US crude are reported to be heading to Asia. This increasing arrival of arbitrage crude is putting significant pressure on West African and other Brent-related sweet grades.
The first-month ICE Brent/NYMEX WTI spread widened to $6.05/b, a 42cent, or 7.4%, expansion.
The light sweet/medium sour crude spread
The sweet/sour differentials in Europe and Asia narrowed on all fronts, amid tighter supplies and healthy demand for sour grades, while lighter grades came under pressure from arbitrage flows from the US. In the USGC, the spread widened, despite lower sour crude imports from OPEC countries.
In Europe, the light sweet North Sea Brent premium to Urals medium sour crude decreased sharply by 71¢ to 47¢/b, bouncing back to a twoyear low premium. Urals differentials to Dated Brent were higher on limited supply of the grade exNovorossiysk in November and lower shipments of crude from the Kurdistan region to the port of Ceyhan. Urals differentials continued to improve against Dated Brent due to a sharp fall in November loadings from Russia's Baltic ports and healthy demand from European refiners.
In Asia, the Tapis premium over Dubai decreased for the first time in four months amid ongoing lower sour crudes supplies. The Brent/Dubai spread also narrowed, theoretically encouraging the flow of west-east arbitrage for Atlantic-Basin crudes.
Spot trading of December-loading cargoes started off on a strong note in the Middle East crude market with several grades sold at premiums against their OSPs. The Dubai Market was supported by the Saudi supply adjustment to some buyers in Japan and China in December. Peak seasonal winter demand in the Northern Hemisphere will lift demand for distillate-rich grades out of the Middle East.
On the other hand, light sweet Tapis was under pressure from increasing US exports to Asia. Demand from the key buyer China for spot crudes in Asia Pacific slowed, as independent refiners in China have used up 2017 crude import quotas and are waiting for Beijing to issue next year's quotas.
The Tapis/Dubai spread narrowed by 59cent to $4.17/b. The Dated Brent/Dubai spread narrowed by 91cent to $1.65/b from $2.56/b in the previous month.
In the USGC, the LLS premium over medium sour Mars increased by 37¢ to $3.11/b, despite limited sour crude imports. 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 export demand from Asia was also a driving factor to the increase in certain USGC grades. In addition, US cash crude differentials broadly rose as Gulf Coast refiners restarted key units at facilities to process the feedstock into products.
Impact of US dollar and inflation on oil prices
On average, the US dollar (USD) advanced against both major currency counterparts and the currencies of emerging markets. This upward trend started mid-September, as concerns about the impact of Hurricane Harvey and Irma on the US economy receded, while geopolitical concerns surrounding the Korean Peninsula also diminished. Meanwhile, amid further strengthening of the labour market, confirmation of a strong performance of the US economy in 3Q17, and a potential boost related to the tax reform package currently discussed in US Congress, market expectations for an interest rate hike by the US Federal Reserve in the upcoming December meeting have increased considerably, giving further support to the US dollar.
On average the dollar increased by 1.4% m-o-m against the euro, also weakened by the extension of the QE programme by the European Central Bank and the on-going push for independence in Catalu?a. Against the Swiss franc, the dollar increased on average by 2.0%. Against the Canadian counterpart, it increased sharply by 2.7%, reversing the previous month’s gain. The dollar gained 0.9% m-o-m against the pound sterling while against the Japanese yen, the dollar advanced by 2.0% m-o-m, also partly on the expectation of further monetary stimulus after the victory of the prime minister’s coalition.
On average, the US dollar increased by 0.8% against the Chinese yuan in October. The dollar advanced by 1.0% m-o-m against the Indian rupee, but part of the gain was limited by the decision of the Reserve Bank of India to leave rates unchanged. Against commodity exporters’ currencies, the dollar increased by 1.8% m-o-m against the Brazilian real, while against the Russian ruble it was flat on average as rising petroleum prices counterbalanced the effect of the dollar’s overall strength. Against the Mexican peso the US dollar jumped by 5.2% during the month, on re-emerging concerns about a new round of NAFTA negotiations.
In nominal terms, the price of the OPEC Reference Basket (ORB) increased by $2.06, or 3.9%, from $53.44/b in September to $55.50/b in October.
In real terms, after accounting for inflation and currency fluctuations, the ORB increased to $36.36/b in October from $34.59/b (base June 2001=100) in the previous month. Over the same period, the US dollar increased by 1.0% against the import-weighted modified Geneva I + US dollar basket1 , while inflation declined by 0.1%.