Little change in crude prices

Sam Fletcher
OGJ Senior Writer

There has been little change in absolute prices for crude that have settled at similar monthly averages, “while the main current dynamics relate to spreads,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

Average prices in recent months for North Sea Brent crude show “how profound the lack of action has been,” Horsnell reported Sept. 9. In May, the front-month IPE contract for Brent averaged $77/bbl, dropping to $75.66/bbl in June and $75.36/bbl in July before rising to an average $77.12/bbl in August, “which also happens to be the same as the average for September-to-date,” Horsnell said.

“The range of the monthly Brent averages from May to August was just $1.76 this year, while in 2009 it was $14.47/bbl and in 2008 it was $19.33,” he said, adding, “Indeed, the previous time the range for the averages over the Northern Hemisphere summer was less than $2 was 1997, when the absolute level of prices was just $18/bbl.”

To find a summer that can match 2010 in terms of the lack of percentage variation in monthly averages, Horsnell said, “One has to go all the way back to 1985, when…it was all looking a bit grim.”

Brent gained 43¢ to close at $78.17/bbl on Sept. 8, “and the average for the year-to-date is $77.82/bbl while the quarter-to-date average is $76.34/bbl,” said Horsnell. “There is, in other words, not a lot of variation in any of those numbers. Indeed, since October 2009, the monthly Brent average has been between $73 and $80 in every month, apart from the surge above $85/bbl for the April average.”

Meanwhile, he said, “The prompt WTI contango has widened sharply just as the prompt Brent contango has all but disappeared, as some divergent regional fundamentals have come into play. In our view, the widening of the WTI spread seems overdone in that it has already fully priced in a large eventual build in Cushing, Okla., inventories, the true scale of which is still open to major questions, especially given the fall in Midwest inventories as a whole.”

The October-November WTI spread settled Sept. 8 at a contango of $1.70/bbl, “having widened by $1 over the past 2 weeks alone,” he said. “In sharp contrast, the October-November Brent spread settled at a contango of just 5¢, having narrowed by 50¢ over the past 2 weeks.”

Within Europe, Horsnell said, “The prompt crude market remains tight, reinforced by downside surprises to North Sea output relative even to fairly humble expectations and by the absence of significant European inventory surpluses. However, the major factor behind the sharp widening in WTI spreads is, in our view, somewhat overblown market expectations of significant crude builds in Cushing.”

OPEC’s anniversary
An oil conference started Sept. 10, 1960, in Baghdad that culminated 4 days later with the creation of the Organization of Petroleum Exporting Countries by its five founding members, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since then, Horsnell said, “The impending weakening and death of OPEC has been foretold by analysts and press on a repeated basis over the intervening years.” Now, some 50 years later, some cynics still tend “to write off OPEC’s relevance, understate the cohesion of its aims, and to play down its effectiveness as an influence on prices,” he said.

However, Horsnell said, “Throughout the latest economic cycle, it is very difficult to make the case that OPEC has not been effective in defending prices.” He cited Energy Information Administration estimates the 11 OPEC members with quotas produced 27.16 million b/d in August, “the same as in July and 50,000 b/d higher than in June.” He said, “Output is still 2.26 million b/d lower than the peak reached in mid-2008 before the financial and economic crisis deepened, and it currently stands just 250,000 b/d higher year over year.” He reported “no convincing evidence of any loss of production discipline this year.”

(Online Sept. 13, 2010; author’s e-mail: samf@ogjonline.com)

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