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Crude Oil Price Movements

OPEC Monthly Oil Market Report – October 2017

5

The net long positions in

Brent

rose by 92,094 contracts to 508,645 lots, or 509 mb of oil, the highest level in

six months, according

the US Commodity Futures Trading Commission (CFTC)

and

ICE data

. Meanwhile,

net long positions in

WTI

increased by 104,485 contracts to 251,788 lots. Hedge fund positioning in Brent

and especially WTI is less lopsided, with net positions and ratios in both crudes well below the peaks set

earlier this year. The total futures and options

open interest

volume in the two exchanges was also up 8.6%

at 6.16 million contracts.

The

daily average traded volume

for

NYMEX WTI

contracts dropped by 131,254 lots, or 8.7%, to

1,378,549 contracts, while that of

ICE Brent

was just 2,499 contracts higher, up by 0.3% at 944,497 lots.

Daily aggregate traded volume for both crude oil futures markets decreased by 128,756 contracts to

2.32 million futures contracts, or about 2.3 billion b/d of crude oil. Total traded volume NYMEX WTI and

ICE Brent futures in September was lower at 27.57 million and 19.83 million contracts, respectively, due to

shorter days of trading over the month compared to the previous month.

The futures market structure

Since last month, the front end of the Brent crude contract curve has flipped into backwardation, where

prices in the near term are more expensive than those further out, while US crude futures remain in a

contango, where near-term supplies are cheaper, through next year.

Global marker

Brent

's backwardation extended

past close-by months to contracts through

December 2021, reflecting tighter supplies due to

the supply adjustments by OPEC and non-OPEC

producers as also more West African crude moving

to Asia and floating storage disappeared. Strong

refinery demand both in Europe and Asia has

helped clear up an overhang of oil that was stored

at sea when the structure of the physical forward

market was in a contango. Meanwhile, unplanned

global production outages, which were at a five-

month high of 1.85 mb/d in September, up from a

multi-year low in July, is helping to strengthen

backwardation in the Brent forward curve. Several

of the supply disruptions are set to extend through

to year-end, when refinery runs will pick up amid

exceptionally higher margins and new capacity

starting in China, so the strength in physical grades

will persist. This backwardation will help drain

inventories at a faster rate in the months ahead.

Graph 1 - 4: ICE Brent forward curves

In contrast, the

WTI

contango worsened, which

continues to signal large oversupply. Hurricane

Harvey exacerbated excess US domestic supply by

forcing the closure of nearly 25% of US refining

capacity and half a dozen USGC ports and pipelines

earlier in the month. At the US storage hub of

Cushing, Oklahoma, the delivery point of the WTI

contract, inventories are still near seasonal highs at

almost 60 mb. During the height of summer demand,

stocks fell by around 2.5 mb per month, but those

stocks will need to fall faster to allow a switch to

backwardation.

Graph 1 - 5: NYMEX WTI forward curves

46

48

50

52

54

56

58

60

1FM 3FM 5FM 7FM 9FM 11FM

US$/b

ICE Brent: 25 Aug 17

ICE Brent: 25 Sep 17

Note: FM = future month.

Sources: Intercontinental Exchange and OPEC Secretariat.

46

48

50

52

54

56

58

60

1FM 3FM 5FM 7FM 9FM 11FM

US$/b

NYMEX WTI: 25 Aug 17

NYMEX WTI: 25 Sep 17

Note: FM = future month.

Sources: CME Group and OPEC Secretariat.