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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 the quarter.

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.

Dated Brent ($/Barrel): January 2 - June 28, 2013

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.

Forties Differential ($/Barrel): January 2 - June 28, 2013

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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Next page: North Sea crude values remain under pressure as sweet demand falls

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