The oil futures market 1/2022

The oil futures market

Crude oil futures prices ended 2021 markedly higher compared with late 2020, with major oil futures contracts ICE Brent and NYMEX WTI rising by 50% and 55%, respectively, amid robust global economic growth of 5.5%, and a strong rebound in global oil demand in both OECD and non-OECD regions, which held at 6.2%, driven by the road transportation and petrochemical sectors. Accelerating the rollout of COVID-19 vaccines across the world helped ease strict lockdowns and mobility restrictions. The oil market was also widely supported by an easing global supply overhang and more balanced oil supply/demand fundamentals, due to ongoing crude oil supply adjustments by OPEC Member Countries and non-OPEC countries participating in the DoC, resulting in sharp drawdowns in global oil stocks, with commercial OECD stocks falling to below the 2015-2019 five-year average. On a yearly average, ICE Brent rose by $27.74, or 64%, to $70.95/b, its highest level since 2018, while the NYMEX WTI rose by $28.76, or 73%, to $68.11/b, its highest level since 2014.

However, in December, crude oil futures prices declined for the second consecutive month, falling from multi- year highs registered in October, amid persistent market volatility that remained fuelled by rising uncertainty regarding the impact of the rapid spread of the Omicron variant and its effect on the global economy and oil demand. Uncertainties about the effectiveness of available vaccines against Omicron and a warning from the World Health Organization stating that “the overall risk related to the new variant of concern Omicron remains very high” added worries to the oil market.

On a monthly average, ICE Brent and NYMEX WTI declined by 7.5% and 8.8% respectively m-o-m, recording their largest monthly loss since April 2020.

Oil prices came under further downward pressure after some countries introduced stricter mobility restrictions, especially in Europe, while in China the government imposed a lockdown on a major city of 13 million people. Moreover, relatively warm temperatures in the early days of winter in some northern hemisphere countries ‒ including the US ‒ cooled optimistic expectations regarding gas-to-liquids switching. Some agencies lowered their 2021 and 2022 global oil demand growth forecasts last month.

A signal from the US Federal Reserve (Fed) Chairman in early December on the potential end of the asset purchase programme from the central bank sooner than expected, and the ongoing high value of the US dollar in December compared with previous months, also weighed on market sentiment.

Table 1 – 2: Crude oil futures, US$/b

Note: Totals may not add up due to independent rounding. Sources: CME, DME, ICE and OPEC.

However, oil prices pared some losses in the last ten days of December, as fears of a large negative impact by the Omicron variant on oil demand eased amid signs of sustained demand in major oil-consuming countries. Mobility data showed a further recovery in some Asian and Latin American countries, while in Europe and the US mobility indices showed resilient seasonal levels, remaining well above last year’s figures. Oil prices were also supported by supply outages in several regions, including declarations of force majeure in Ecuador and Libya.

The ICE Brent front-month decreased by $6.05, or 7.5%, in December to average $74.80/b,  while the  NYMEX WTI fell by $6.96, or 8.8%, to average $71.69/b. Y-t-d, ICE Brent was $27.74, or 64.2% lower, at $70.95/b, while NYMEX WTI was higher by $28.77, or 73.1%, at $68.11/b, compared with the same period a year earlier. DME Oman crude oil futures prices decreased in December by $6.30 m-o-m, or 7.9%, to settle at $73.40/b. Y-t-d, DME Oman was higher by $26.47, or 61.5%, at $69.50/b.

On 17 January, ICE Brent stood at $86.48/b. Due to a public holiday in the US, the data for NYMEX WTI is not available. On 14 January, NYMEX WTI stood at $83.82/b.

The ICE Brent/NYMEX WTI spread rose in December to above $3/b, widening from recent monthly lows, as the NYMEX WTI price fell by more than ICE Brent last month. This is partly due to low stock levels registered at Cushing, Oklahoma, since late August,  which  supported  the  NYMEX  WTI  price.  In  December,  the  ICE Brent/NYMEX WTI spread widened by 91¢ to an average of $3.11/b. Cushing stocks fell in November to 26 mb, the lowest level since September 2018, while by the end of 2021 they rose to 37 mb. The availability of up to 50 mb of crude supply from US SPR also weighed briefly on domestic oil prices. Meanwhile, US gasoline stocks rose sharply in December, while the weekly US refiner net input of crude oil registered a slight increase last December compared with the previous month, according to US Energy Information Administration (EIA) weekly data. However, the North Sea Dated-WTI Houston’s first-month spread narrowed in December, and the value of North Sea Dated was 75¢/b lower than WTI Houston on a monthly average, compared with a premium of $1.81/b in November. Meanwhile, US crude oil exports were little changed m-o-m in December, remaining at about 3 mb/d, according to weekly EIA data.

Hedge funds and other money managers extended sharp selling in the first half of December, cutting combined futures and options net long positions related to ICE Brent and NYMEX WTI by about 30% between the week of 14 December and early November, representing the sale of an equivalent of about 174 mb. The selloff came amid a decline in oil futures prices, while speculators probably considered a worst-case scenario related to the impact of the Omicron variant on global oil demand. However, in the second half of December, money managers recovered part of their long position on expected higher prices amid supply disruptions in several regions that could reduce oil availability in the short term. By the end of the week of 28 December, money managers held net long positions equivalent to about 454 mb in the two main crude oil futures and options contracts. Money managers were net buyers of about 30 mb between the week ending 28 December and the week of 30 November, a decline of 7.0%.