ICE Brent futures lose previous quarter's premium to NYMEX WTI, Dubai
By Pauline Lichwa in London
July 8, 2013 - After a strong performance at the beginning of the year, the forward
Brent complex lost some of its strength to WTI and Dubai crude futures in the
second quarter of 2013 on a combination of European demand woes and stronger
East and West crudes.
Brent/WTI narrows to lowest value since January 2011. (See related chart: Dated Brent ($/Barrel): January 2 - June 28, 2013).
The narrowing of the spread between the ICE Brent futures and NYMEX
light sweet contract -- known as Brent/WTI spread -- was a notable change in
Toward the end of June, the ICE Brent front-month futures contract
narrowed its premium to front-month NYMEX crude to below $6/barrel, more than
halving from the beginning of the quarter. (A trend which of course has
continued, with the spread tumbling below $5/b and even $4/b in just the
first three days of July.)
Analysis continues below...
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At this level the spread was at the narrowest it had been since January
2011, and was significantly down from a peak of $22.71/b on February 8, 2013,
Platts data shows.
The trend began with the Brent complex coming under pressure following
the withdrawal of taxation incentives for South Korean refiners, limiting the
North Sea-South Korean arbitrage after the Korean government closed a
loophole on their oil product exports.
For much of the 12 months from 2012, the North Sea-South Korea arbitrage
was one of the bullish factors for the North Sea Forties grade and therefore
for the Dated Brent complex.
The absence of the South Korean arbitrage for most of the quarter
contributed to the ICE Brent futures front-months' backwardation -- the
premium for more prompt delivery -- narrowing from an average of around
$0.80/b in Q1 to just above $0.17/b in Q2.
While seasonally the second
quarter of the year is the weakest for the crude demand due to the European
maintenance program the Q2 2013 backwardation was also down from Q2 2012
backwardation, which was assessed on average at almost $0.30/b at 16:30
London time assessments, according to Platts data.
Increased competition from West African crudes, especially the lighter,
sweeter crudes, was another bearish factor for Brent.
As local crude production in North America continued apace, fewer
cargoes of sweet Nigerian crudes were shipped to the US, leaving the barrels
to sometimes compete for European homes.
Furthermore, the improvement of logistics to transport crude oil across
the US, especially from Cushing, Oklahoma -- the delivery and settlement
point for the NYMEX light sweet crude futures contract -- was another factor
contributing to the narrowing spread.
The accelerated narrowing of the spread has coincided with more crude
reaching Gulf Coast refiners from the 400,000 b/d Enterprise Products
Partners-operated Seaway Pipeline -- which runs to Jones Creek, Texas, from
Cushing -- and the 135,000 b/d Magellan Midstream Partners' reversed Crane,
Texas, to Houston Longhorn crude pipeline.
The restart of BP's 405,000 b/d Whiting refinery CDU was also closely
watched by industry participants, with some seeing this new demand hub as a
reason for the structural shift on the NYMEX contract from an almost
year-and-a-half period of contango into a backwardation.
NYMEX crude futures' front-month contracts traded in backwardation
following the expiry of the July futures contract June 20.
Finally, increased open interest from non-commercial investors in the
NYMEX contract versus ICE Brent was another factor weighing on the narrowing
of the spread outside of the fundamentals.
Brent/Dubai bounces from early dip on North Sea maintenance impact
The relationship between ICE Brent crude futures and the Dubai crude
swap -- known as the Exchange Futures for Swap (EFS) -- also narrowed on the
previous quarter, although from the beginning of April until the end of June
the spread was generally trending upward.
At the beginning of April the front-months' spread between the two
benchmarks dipped to just above $2/b, down from peaking at more than $5/b in
January and February, Platts data shows.
The initial dip occurred as Brent came under pressure from the
diminished incentive to export North Sea material to South Korea, while Asian
refiners were approaching end of the maintenance season when demand for local
crude typically increases.
Despite the end of maintenance, though, Asian demand remained
lackluster, which contributed to a widening of the EFS differential. Against
this background a very rare arbitrage was fixed by Trafigura at the end of
May to take 2 million barrels of Oman crude oil -- part of the basis of the
Dubai assessment -- to the Mediterranean. Trafigura did not comment on the
matter at the time.
Between May and June the front-month EFS was trading in above $3/b
values with the front-month/second-month swap often assessed in contango,
driven by the expectation that Brent would eventually rebound due to planned
summer maintenance on North Sea platforms.
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