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OPEC Reference Basket July 2014

The OPEC Reference Basket (ORB) extended its previous month’s gains by nearly
$2.50 in June to reach its highest value this year, uplifted by a surge in crude oil
outright prices. For most of June, global crude oil markets were rattled by supply
concerns due to the ongoing crises in Libya and Ukraine, while the geopolitical tension
in Iraq has fuelled fears of disruption in exports from the Middle East region. This is
despite the fact that crude oil markets were adequately supplied during the month. In
fact, some markets were over supplied amid poor refining economics, which caused
physical crude oil markets in many regions to weaken significantly. Physical crude
markets were under pressure with the differentials of physical crudes to their respective
benchmarks at their lowest in over a year in most markets.

On a monthly basis, the ORB improved to an average of $107.89/b in June, up $2.45,
or 2.33% over the previous month. On a year-to-date basis, the Basket was higher, the
first time since December 2012, compared to the same period last year. The Basket
year-to-date value stood at $105.30/b compared to the $105.09/b average of last year,
21¢ or 0.20% higher.


OPEC reference basket

All Basket component values increased in June mainly due to the uplift in outright
prices of their respective benchmarks and pricing formula elements. Benchmark prices,
particularly Brent, surged in response to fresh geopolitical tension in Iraq in addition to
the ongoing conflicts in Libya and Ukraine that raised supply disruption concerns,
increasing the geopolitical risk premium.
Nevertheless, this support for the component values was countered by pressure from
lacklustre physical crude demand on the part of major buyers and weak refining
margins. A narrowing in refining margins has hit European demand for both sweet and
sour crudes, while large customers such as China have been buying less West African
crudes due to high product stocks, cheaper crude in other markets and higher freight
rates. West African oil has become relatively expensive for Asian importers due to a
high premium of Brent crude oil, against which it is benchmarked, to Dubai crude.
Asia’s crude demand has also been muted as weak demand for oil products coupled
with excess regional supply are expected to keep refinery operating rates lower
through the third quarter and into the end of the year.

Latest OPEC oil production figures

• Crude oil output from OPEC fell to 30.45mn b/d in June 2013, down from 30.57mn b/d in May, as lower volumes from Libya and Iraq more than offset an increase from top producer Saudi Arabia.

• ‘What’s notable about this month’s figures is not the Libyan decline, because that was known since the start of June, but the way the Saudis stepped right in to fill that gap.

• ‘The Saudi role as swing producer becomes more significant every month, as the kingdom puts oil into the market when it’s needed, and takes it out when it’s not. It has been particularly aggressive in this role in recent months.’

• Libyan production, which had recovered to around 1.4mn b/d in May, plunged by 200,000 b/d in June amid continuing political unrest that has included protests at key oil fields across the country. Libyan oil output had fallen below 1mn b/d because of the protests and other technical issues.

• In mid-June, there had been a ‘massive’ decline in production at some of Libya’s major fields, among them Elephant, Sharara, Sarir and Messla. Security personnel have been protesting since 2 June at the Elephant field, which is operated by a joint venture between NOC and Italy’s Eni, demanding improved pay and conditions.

• Reduced exports took Iraqi output down by around 100,000 b/d to 3mn b/d. The northern pipeline system, which carries crude to Ceyhan on the Turkish Mediterranean, has been subject to repeated attacks by insurgents.
• Exports from Ceyhan were suspended in mid-June. Other smaller dips in output came from Algeria, Angola and Nigeria. The 1.88mn b/d estimate for Nigeria was the lowest since September 2009, when production was pegged at 1.85mn b/d. Nigeria is subject to frequent sabotage of oil installations and pipelines and is also seeing the US export market shrink dramatically.

• Usan normally produces between 90,000 b/d and 110,000 b/d. OPEC kingpin Saudi Arabia boosted output by 250,000 b/d to 9.65mn b/d, the highest volume since November 2012 when output was estimated at 9.82mn b/d. Saudi output typically climbs in summer to meet increased demand from domestic power stations for direct-burning crude. Saudi output was estimated at an average 10mn b/d during May, June, July and August 2012.

• There were smaller increases of 10,000 b/d each from Kuwait and the United Arab Emirates.
The latest survey indicates OPEC is overproducing its official 30mn b/d ceiling, which has been in place since January 2012, by 450,000 b/d. Adherence to the ceiling, however, is informal as OPEC has not set individual country quotas. This effectively leaves the management of the market to Saudi Arabia, the only country with the ability to make significant adjustments to output.

• Meanwhile, according to OPEC’s latest monthly oil market report, the oil cartel expects demand for its crude to decline again, to 29.61mn b/d, in 2014, as rising oil supply from independent producers outpaces the predicted increase in global oil consumption.

• This represents a year-on-year drop of around 250,000 b/d after an anticipated fall of 420,000 b/d this year. The forecast call on OPEC crude for next year is well below current production, which OPEC states averaged 30.379mn b/d in June.