The OPEC Reference Basket (ORB) fell by a substantial $4.86 to $100.75/b as a downturn in oil prices continued for a second month, amid ample supplies and weak demand.
The Basket year-to-date value stood at $104.78/b. Crude oil futures fell to their lowest levels of the year as weak underlying market fundamentals and intense speculative behaviour drove down prices. The Nymex WTI front- month contract lost $6.32 to stand at $96.08/b. Compared with the same period in 2013, WTI's value was still $3.31 higher at $100.44/b. The ICE Brent front-month contract dropped $4.79 in August, to end at $103.40/b. Year-to-date, ICE Brent was 26Ao lower at $108.07/b. Downward pressure on prices came largely from speculators, who in a two-month span reduced their net long positions in ICE Brent and Nymex WTI futures by nearly 75 per cent and 45 per cent, respectively. After touching a year low of about $5.80/b in July, the WTI/ Brent spread bounced back to levels seen in the first half of this year at around $7.30/b, as stock draws at Cushing, Oklahoma, finally stalled.
OPEC REFERENCE BASKET
The ORB dipped further for the second month in a row to its lowest value in more than a year as the crude oil market perceived the risk of supply disruptions abating, while a supply overhang and lacklustre refinery demand drove prices down for two consecutive months. The Basket lost close to a hefty $5 over the month, the largest one-month drop in a year and a half. In two months, the Basket slipped more than $7, but remained above the $100/b mark, where it has been for more than two years.
On a monthly basis, the OPEC Reference Basket dropped to an average of $100.75/b in August, down $4.86, or 4.60 per cent below July. On a year-to-date basis, the Basket was lower compared with the same period one year earlier. The Basket year-to-date value stood at $104.78/b compared with an average of $105.40/b the previous year, 62Ao lower.
Once again, Brent-related Basket components from West and North Africa lost a significant share of their value in August, accumulating a decline in value of around $10 in two months. Ample supply and lackluster buying interest in Asia and Europe weighed on the market. West African crude differentials held at their lowest in around five years amid slack demand from Asia and weakness in competing grades. In the Mediterranean, sweet crude grades were also under pressure from rising Libyan supply despite uncertainty surrounding the return of Libyan oil.
Brent-related Basket components Saharan Blend, Es Sider, Girassol and Bonny Light dropped about a hefty $6 or 5.6 per cent, on top of the previous month's $5 loses. Both Latin American Basket components - Merey and Oriente - slipped in line with the drop in outright WTI market prices, losing almost 4.4 per cent over the month on average. Oriente and Merey decreased by $5.68 and $2.75 in August, respectively.
Middle Eastern spot prices also suffered as ample supply and weak demand in Asia continued to weigh on the market. Middle Eastern and Russian crudes priced on Dubai were under pressure as the spread between the Middle East marker and Brent dropped to its narrowest point in four years.
The slim price difference has also opened the arbitrage window for competing supplies from Europe, Africa and Latin America to enter Asia. With low margins, Asian refiners are also processing less crude, cutting demand as increasing US shale oil output pushes excess oil from the Atlantic Basin and Latin America eastward. Middle Eastern spot components and multi-destination grades fell by about $4.50 and $4.80, respectively. On 9 September, the OPEC Reference Basket weakened to $96.99/b, $3.76 under the August average.
THE OIL FUTURES MARKET
Crude oil futures fell to their lowest levels of the year in August as weak underlying fundamentals in the market and intense speculative behaviour drove prices lower for two consecutive months. ICE Brent fell by more than $4 to $103.40/b, its lowest value since June 2013. Nymex WTI dropped by over $6, ending up below the key $100/b marker at about $96/b, it lowest value in six months.
A further easing of supply concerns and softening demand combined to help slacken crude oil markets over the two months. An agreement to open some Libyan ports and resume exports of crude made additional barrels available on the global market and applied downward pressure on light sweet crude oil prices. Low refinery runs in Asia and Europe capped demand for crude oil and expectations for global economic growth were revised lower compared with the previous month, remaining below growth rates projected at the start of 2014.
Given this, key oil demand forecasting agencies have turned bearish and reduced lobal demand growth from earlier estimations. This significant drop in crude oil prices was not caused by weak fundamentals alone; much of it is due to stimulus trading by speculators, which sent prices to new highs three months ago. Hedge fund and other money managers trimmed their net long positions significantly during this period, US Commodity Futures Trading Commission (CFTC) and InterContinental Exchange (ICE) data shows.
The Nymex WTI front-month plunged $6.32 over the month, to average $96.08/b in August. Compared with the same period in 2013, WTI's value is still higher by $3.78 or 3.9 per cent at $100.44/b. On the ICE exchange, Brent front-month dropped $4.79 to an average of $103.40/b, below $105/b for the first time since June 2013. Year-to-date, ICE Brent was slightly lower in value compared with the same period one year ago. Its value weakened by 8Ao or 0.1 per cent to $108.07/b from $108.15/b. On 9 September, ICE Brent stood at $99.16/b and Nymex WTI at $92.75/b.
Speculators of the two main crude oil futures contracts reduced their net long positions by nearly 50 per cent, exerting significant downward pressure on prices over the month. In a two-month span, as prices plunged by over $10, hedge fund and other money managers trimmed their net long positions by a hefty 73 per cent and 45 per cent in ICE Brent and Nymex WTI futures, respectively. These positions are now at their lowest in almost two years, according to data from ICE and the CFTC.
Money managers decreased their net long futures and options positions in ICE Brent by 55,697 contracts to 64,998 lots, the lowest since mid-July 2013. CFTC data shows that hedge fund and money managers also decreased their bullish bets in US crude oil futures by cutting their net long US crude futures and options positions during Julyand August as prices decreased. The speculator group cut its combined futures and options positions in US crude oil contracts to 189,753 lots from 276,741 contracts. Moreover, total futures and options open interest volume in the two markets decreased in August by 105,880 contracts to 3.76 million contracts.
The daily average traded volume during August for Nymex WTI contracts decreased by 47,371 lots to average 525,318 contracts. ICE Brent daily traded volume fell sharply by 135,416 contracts to 612,502 lots. Daily aggregate traded volume in both crude oil futures markets decreased by 182,787 contracts in August to around 1.14 million future contracts, equivalent to around 1.14 billion b/d. The total traded volume in Nymex WTI and ICE Brent was 11.03 and 12.86 million contracts, respectively, over the month.
OIL MARKET HIGHLIGHTS
Crude Oil Price Movements The OPEC Reference Basket fell by $4.86 in August to stand at $100.75/b. Nymex WTI declined by $6.32 to $96.08/b and ICE Brent dropped $4.79 to $103.40/b. Speculators sharply cut net long positions amid ample supply and low demand. The Brent- WTI spread widened to around $7.30/b as stock draws at Cushing, Oklahoma, have finally stalled.
World Economy World economic growth for 2014 and 2015 remains unchanged at 3.1 per cent and 3.4 per cent respectively. A better-than- expected US GDP in 2Q14 was offset by on-going challenges in the Euro-zone and a large decline in 2Q14 GDP growth in Japan. This kept the OECD GDP growth forecast at 1.8 per cent in 2014 and 2.0 per cent in 2015. Expectations for China and India remain unchanged, with China growing at 7.4 per cent and 7.2 per cent, and India at 5.5 per cent and 5.8 per cent. Brazil has been revised down to 0.7 per cent in 2014 and 1.4 per cent in 2015, and Russia's GDP growth forecast has also been lowered to 0.3 per cent in 2014 and 1.1 per cent in 2015.
World Oil Demand
World oil demand growth in 2014 is expected to reach 1.05 mb/d, following a downward revision of around 50 tb/d, mainly due to the weaker-than-expected performance of the OECD region. In 2015, world oil demand is forecast to increase by 1.19 mb/d, representing a marginal downward adjustment, as an upward revision in the non-OECD region was offset by slower OECD growth.
World Oil Supply
Non-OPEC oil supply growth is expected to increase by 1.68 mb/d in 2014, following an upward revision of 180 tb/d from last month. In 2015, non-OPEC oil supply is projected to grow by 1.24 mb/d, representing a downward adjustment of 30 tb/d from the previous forecast. OPEC NGLs and non-conventional liquids are forecast to grow by 0.2 mb/d in 2015 to average 6.03 mb/d. In August, OPEC crude oil production according to secondary sources increased by 231 tb/d to average 30.35 mb/d.
Product Markets and Refining Operations
Product markets in the Atlantic Basin saw support from strong US gasoline demand amid a tightening sentiment due to falling inventories. Steady middle distillate demand and lower inflows into the region prevented European margins from dropping while US margins were boosted by falling WTI prices. In Asia, the weaker light distillates market caused refinery margins to continue weakening.
A general weak sentiment was seen in the dirty tanker market in August on the back of low tonnage demand and reduced activities. Clean tanker freight rates improved East of Suez but encountered a slight decline in the West. OPEC and Middle East sailings declined compared to the previous month, although arrivals in all regions were higher, except in the Far East.
OECD commercial oil inventories rose in July, but remained 37 mb below the five-year average. Crude showed a surplus of around 22 mb, while products registered a deficit of 59 mb. In terms of forward cover, OECD commercial stocks stood at 58.2 days in July. Preliminary data for August shows that US total commercial oil stocks rose by around 3.7 mb, which is around 10.0 mb above the five-year average. Crude and product stocks showed surpluses of 7.0 mb and 3.0 mb, respectively.
Balance of Supply and Demand Demand for OPEC crude in 2014 was revised down by 0.2 mb/d from the previous month to stand at 29.5 mb/d. In 2015, required OPEC crude was also revised down by 0.2 mb/d to stand at 29.2 mb/d.
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