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The Oil Futures Market - Sep 08

Source: OPEC_RP080912 9/16/2008, Location: Europe

The futures market continued the downward trend with investors exiting the market on fund sell-offs for profit-taking. However, volatility continued on supply disruptions from West Africa and geopolitics in the Middle East while OPEC assured supply flow. The weaker economic outlook and the strengthening US dollar also lent support to the bearishness in the marketplace. Although Nymex WTI’s first weekly average dropped 71¢ to $123.31/b, the weekly period closed down by $3.02 or 2.5% at $119.17/b. In the first weekly period, noncommercial net positions widened into net short by 4,900 to 5,550 contracts amid a drop in the long positions while shorts rose moderately. In contrast, open interest volume increased by 28,800 to 1,249,300 contracts. With options included, non-commercial net positions dropped 8,200 but remained net long at 72,100 lots, while open interest volume rose by almost 79,000 to 2,863,500 lots.

In the second weekly period, the CFTC revealed that non-commercials continued to deplete positions as speculators exited the futures market. Net positions plunged another 3,580 to 9,130 contracts amid depleting long positions at a faster pace than shorts. Open interest volume was nearly 7,900 lower at 1,241,400 lots. With options included, open interest volume was inflated by nearly 58,000 to 2,921,500 lots, yet net long positions were down by 13,300 to 58,800 contracts. In the second weekly period, the down trend prevailed amid lower Chinese oil imports implying slower demand growth, the strengthening US dollar and weak economy which outweighed a fire on a 1 mb/d pipeline in Turkey and a hefty gasoline inventory draw the week before. The weekly average for the Nymex WTI front month contract plunged a hefty $7.06 or 5.7% to $116.25/b to close the week $6.16 lower at $113.01/b.

The downtrend continued into the third week on the perception of a weak economy and profit taking. High OPEC exports also lent support to calmness in the marketplace. However, the deterioration of the US dollar exchange rate supported the market sentiment later in the period. Nymex WTI closed the period up $1.52 at $114.53/b, yet the weekly average was down by $1.81 or 1.5% at $114.44/b. The CFTC reported that non-commercials flipped into net long after four consecutive weeks of net short. Due to a hefty increase in long positions while the short depleted, the result was 20,800 higher to net long of 11,700 lots. In contrast, open interest volume was 37,700 narrower at 1,203,800 contracts. With options included, open interest volume deflated by a hefty 206,600 to 2,714,900 lots, yet net long positions were 15,800 wider at 74,600 contracts.

In the fourth weekly period, the sentiment changed with the CFTC reporting that net noncommercial positions were 8,500 wider at 20,166 contracts, yet open interest volume fell by 16,100 to 1,187,600 lots, the lowest level since December 2006. In contrast, with options included, open interest volume rose by 25,800 to 2,740,700 lots while non-commercials net positions widened by 5,600 into net long of 80,222 contracts. The fourth weekly period saw an upward trend on concern over gasoline supplies in the US ahead of the final peak of the US driving season, Russia’s dispute with Georgia in the Caucasus, the approach of Hurricane Gustav in the Gulf of Mexico and fluctuations in the US dollar keeping volatility in place. The Nymex WTI front month contract closed the weekly period $1.74 or 1.5% higher to settle at $116.27/b to average the period $1.99 or 1.4% firmer at $116.43/b. However, in the final days of the month, the bearish sentiment resumed despite Hurricane Gustav halting petroleum operations in the Gulf of Mexico with minimal repairs seen, amid the announced readiness of the IEA and the DoE to release crude oil from the emergency stockpile. Sustained US dollar strength against major currencies prompted speculative investors away from the crude futures market. Thus, crude oil futures contracts plunged below the threshold level of $110/b into the first week of September with non-commercial net long positions on the CFTC dropping 5,800 to 14,300 contracts.

However, open interest volume inflated by 39,200 to 1,226,900 lots. With options included, open interest was 105,500 wider at 2,846,200 contracts while non-commercial net long deflated by 5,900 to 74,300 lots.

On a monthly basis, the weekly average of non-commercial net positions in August fell 7,500 to 4,300 contracts net long, the lowest level since February 2007, and some 59,000 lots lower than in same period last year. Open interest volume slipped 58,000 to average 1,220,500 contracts, which made it nearly 249,000 lots lower than last year. With options included, open interest volume was almost 47,000 narrower at 2,810,100 lots, yet 333,000 contracts higher on the year. Non-commercial net longs averaged 14,200 lower at 71,400 lots in August, nearly 44,200 contracts lower than last year. A series of downward indicators pushed the futures market lower after a peak in July. Ample OPEC exports, and the strengthening of the US dollar inspired fund sell-offs for profit-taking, though geopolitics from West Africa, the Middle East and the Caucasus kept some bulls intact. However, the momentum was short-lived amid lower oil imports by China implying weak demand growth on the back of slower economies. Nymex WTI averaged $16.79 or 12.5% lower in August at $116.69/b, some 61% higher than last year’s level.

The Forward Structure
Although the weekly crude oil average in August increased by 6.4 mb over the previous month to 301.8 mb, yet it was 33.4 mb lower than last year’s level. The contango structure narrowed in recent weeks with the 1st/2nd month spread at 23¢/b, down by 37¢ from July, compared to a 31¢/b backwardation last year. The 1st/6th, 1st/12th and 1st/18th month contango spreads were $1.41, $1.25 and 53¢/b, down by 48¢, 38¢ and 11¢/b respectively from the month before, compared to $1.68, $2.43 and $2.77/b last year. The refinery run rate averaged 15 mb/d in August, down 300,000 b/d on the month and over 0.7 mb/d on the year, with the year-to-date average down 350,000 b/d from the same period last year.

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