OPEC Reference Basket
The Basket emerged in the first week of August on continued weakness due to slow economic growth which was denting oil demand, while the rebound in the US dollar inspired fund liquidation on profit-taking of the currency-dominated commodities. However, fear of a potential supply shortfall amid tensions in the Caucasus kept alertness in place. The threat of Tropical Storm Edouard in the Gulf of Mexico triggered the shut-in of about 6% of crude oil and over 12% of natural gas production signalling fear of a supply shortfall of both streams. Yet, persistent higher OPEC exports kept calmness in the marketplace. A surprise build in US weekly crude oil stocks, the easing threat of the tropical storm in the Gulf of Mexico and concern over the economic outlook sustained market bearishness. In the first week, the Basket average plunged a hefty $5.98/b or nearly 5% to settle at $115.89/b. In the second week, the continued strengthening of the US dollar, higher production from the North Sea and lower crude imports from China which offset the prolonged conflict in the Caucasus disrupted oil supply from the region. Thus, the Basket closed the week to average $6.16/b or 5.3% lower to settle at $109.73/b.
In the third week, supply from the Caucasus region tightened amid the closure of a pipeline on geopolitical tensions and the weakening of the US dollar exchange rate inspired further investment in energy futures adding some bullishness. Moreover, persistent refinery outages in the US raised fear of seasonal fuel supply shortfalls. The bulls were furthered by an unexpected draw on US gasoline inventories and despite the hefty build in crude stocks. The Basket saw a one-day rally of 3.9%. The Basket’s weekly average firmed for the first time in seven weeks rising $1.35/b or 1.2% to settle at $111.08/b. In the final week, the formation of Tropical Storm Gustav in the Atlantic offset higher export data from OPEC Member Countries. Hence, the Basket saw a one-day decline of 3.5%. However, the strengthening of Gustav into the Gulf of Mexico prompted the IEA and the US DoE to announce their readiness to release crude oil from the SPR, which calmed fear of a supply shortfall due to the storm. The strengthening of the US dollar on stronger-than-expected GDP growth inspired speculative fund sell-offs for profit-taking as investors exited the crude futures market. The Basket closed the final week a marginal 12¢ firmer at $111.20/b.
On a monthly basis, the Basket eased in August as the weaker economic outlook was seen denting demand. Higher OPEC exports calmed market sentiment while China’s lower imports triggered concern over demand growth. However, geopolitics in the Middle East, the Caucasus and West Africa kept some bulls intact. Unplanned refinery outages and depleting gasoline supplies capped the bulls in August. Thus, the Basket averaged the month $18.81/b or more than 14% lower to stand at $112.41/b. In the first week of September, the Basket continued to retreat amid the recovery of the US dollar to a one-year high. The weak economic outlook was seen eating into demand while assessed damages by Hurricane Gustav were foreseen to be minimal. The approach of Tropical Storm Ike delayed repairs from previous storms. The Basket slipped to a five-month low below the $100/b level on the continued firmness of the US dollar. On 15 September the OPEC Reference Basket averaged $91.35/b.
Cash sweet crude firmed in the US domestic market in the first week while light grades came under pressure from the opening of the transatlantic spread prompting the flow of crude oil and gasoline into the US. The relative narrowing of the contango spread limited the buying spree. Concerns about light/sweet crude supply due to BP’s declaration of force majeure on Azeri crude shipments from Ceyhan due to the explosion on the BTC pipeline lifted grades higher amid US refinery snags. The WTI/WTS spread averaged the week 86¢ wider at $3/b. In the second week, the sentiment for light grades was firmer amid the widened contango spread while gasoline inventories depleted heavily. Improved refining margins also lent support. Light grades were also supported by the threat seen from Tropical Storm Fay in the Gulf of Mexico in the second week. The WTI/WTS spread narrowed by 59¢/b to $2.41/b.
Light grades continued to strengthen in the US domestic market as the futures market slipped while refinery margins sustained improvement. However, the continued widened contango spread weakened the sentiment while sweet grades firmed. Yet, the narrowing transatlantic arbitrage spread lifted the light grades as gasoline stocks continued to decline ahead of the US Labor Day holiday. In the third week, the average spread narrowed by 45¢ to $1.96/b. In the final week, the sentiment was supported by the prospect of further gasoline stock-draws, yet the return of some refineries from shut-down while crude oil stocks at Cushing, Oklahoma, were at their lowest level since March, and the widened transatlantic spread pressured the light grades. The WTI/WTS spread was 33¢ wider at $2.29/b. WTI averaged in August $17.24/b or 13% lower at $116.58/b, with the premium to WTS averaging $2.42 or 21¢ wider from July.
North Sea market
The market for the North Sea crude emerged on a softer note with more offers than bidders. Higher output in September added to market bearishness. The Brent discount to WTI widened in the first week by $2.04/b to average $2.75/b, the widest level since May. The sentiment firmed into the third week on higher volume in the new regional loading programme while BP’s declaration of force majeure on Azeri crude shipments from Ceyhan due to an explosion at the BTC pipeline lent support to the market. Softening outright prices inspired the buying spree amid disposing of prompt barrels. Thus, the front end of the curve enhanced to clear the barrels. In the second week, the WTI/Bent average spread widened by another $1.99/b to $4.74/b, the widest level since October last year. The sentiment remained weak prompted by late August stems while buying interest for September barrels slackened. Thus, sellers lowered offers to encourage buyers. However, with the emergence of some buying interest, the differentials for North Sea crude firmed in the third week with the Brent discount to WTI narrowed by 81¢ to $3.93/b. The market softened in the final week amid lack of demand while supplies were on the rise in the North Sea. Yet, clearing of prompt barrels on attractive differentials lent support to the market. Thus, the Brent discount to WTI narrowed by 62¢ to $3.31/b. Dated Brent averaged $104.19/b in August, representing a drop of $201.6/b or over 15%, with the discount to WTI averaging $2.92/b wider at $3.55/b, the widest level since April.
Urals crude firmed in the first week on the halt of Iraq’s Kirkuk crude oil shipments from Turkey. The sentiment was boosted further by a Mideast major raising price differentials to Europe. The Mediterranean market strengthened on prompt buying amid Azeri supply shut-in due to a pipeline fire halting 1 mb/d. Thus, sentiment sustained strength as marketers digest the likely impact of the fire on the Baku-Tbilisi-Ceyhan pipeline. In the first week, the Urals discount to WTI was $1.17/b narrower at $1.26/b, marking the narrowest weekly average since August last year. Differentials remained firm into the second week amid uncertainty about Azeri supplies and were further supported by higher official prices for competing sour crude grades from the Middle East. Differentials in the Mediterranean continued to be supported by tight supplies amid the conflict in the Caucasus and the pipeline disruption in Turkey due to fire. Brent premium to Urals was 29¢ narrower at 64¢/b in the second week. The upward volatility continued amid lower exports from Russia while supplies from Central Asia continued prompting aggressive buying. Brent/Urals spread inched up a marginal 6¢ to 70¢/b. The firm sentiment continued on tight supply and prompt buying. The regional market was supported by limited supplies and cuts in Azeri Light exports following the closure of the Baku-Tbilisi-Ceyhan (BTC) pipeline. Urals discount to Brent was 9¢ narrower at 61¢/b. Urals averaged $112.20 or nearly 14% lower in August, yet narrowing the discount to Brent by $2.27/b to 86¢/b, a level lower than that seen in December 2001, amid a rise in North Sea supply boosting the sour grade while refinery margins improved.
Middle Eastern market
The Middle East crude emerged in August under pressure by sinking refinery margins on the weak gasoil crack spread. Nonetheless, sentiment firmed as the spread between Brent and Dubai reversed while freight rates softened attracting the eastward flow of rival western crude. Although a fire at a Turkish pipeline was seen to support the Mideast crude, yet, the opening arbitrage spread allowed the pressure to sustain strength. Dubai was at a premium to Brent that was seen emerging momentarily since July; however, it sustained strength in August with the first weekly average at $1.18/b. The Middle East crude market started the second week on a slightly bullish note amid steady allocations for September barrels, which were not seen dampening demand for spot October crude. However, weakening margins for middle distillates were expected to weigh on the market. Continued opening of the arbitrage window inspired the flow of rival grades. Abu Dhabi Murban was assessed at a 40¢/b discount to ADNOC’s OSP. In the second week the average Brent discount to Dubai narrowed by 29¢ to 89¢/b. The market sentiment weakened amid Asian refineries announcing cuts while October barrels remained largely unsold —an indication of slower demand growth — prompting buyers to move to the sidelines. In the third week, Brent flipped into a premium to Dubai to average a marginal 21¢/b. In the final week, Middle East crude edged down in slow trade as Abu Dhabi supplied its lifters with full term supplies despite planned maintenance, calming market sentiment. The regional crude market fell further with sellers moving to the sidelines as demand remained weak. A slumping gasoil crack spread reduced demand for light grades. October Murban crude was assessed down to a discount of $1/b to ADNOC’s OSP. Dubai averaged $112.90/b in August for a drop of 14%, with the discount to Brent $1.75/b narrower at 17¢/b.