Price difference between OPEC basket and Brent deepens

By Dalga Khatinoglu

The oil price in international markets has started to increase at a slow pace since Jan. 25.

Brent crude for delivery on March 15 is sold at $58.21 on Feb. 6, indicates 2.9 percent increase day-to-day, while the figure was fluctuating below $49 in the week to Jan. 25.

The Brent price was about $112 in June 2014, while OPEC basket price was around $108/barrel.

Oil prices has recently resumed their move upwards but not with equal pace. WTI and Brent experienced a higher restoration in price than OPEC crude's.

The price difference between Brent and OPEC basket was around $3 to $4 per barrel in December 2014.

Glancing at OPEC's crude basket, the price increased from $42.9 on Jan.26 to $52.22 on Feb. 4, but a day after that fell back to $50.81/barrel, pushing the price difference between the Brent and OPEC basket further apart.

The Organization of the Petroleum Exporting Countries (OPEC) forecasted last month that demand for the OPEC's oil would drop to 28.78 million barrels per day in 2015, down 0.14 mbp/d from its prior estimate and over one mbp/d less than it is currently producing.

In reaction, OPEC members reportedly are involved in intense competition by offering more and more discounts to keep their shares in markets.

Fereydoun Barkeshli, the former general manager of National Iranian Oil Company (NIOC) in OPEC and International Affairs told Trend Feb. 6 that the discounts was the major reason, widening the price gap between OPEC oil basket and Brent.

Barkeshli who is currently a private energy consultant and president of Vienna Energy Research Group added that back in 2014, ISIS also possessed and sold Syrian oil at very low prices. ISIS reportedly has been selling oil around $25/barrel.

Oil price volatility and the role of speculation

Sam Barden the director of SBI Markets, an international commodity trading and advisory company, which advises governments and private firms on deal financing and facilitation, offered a different opinion to Trend Feb. 6. He reasoned the spread has widened between Brent and OPEC blends due to the financial speculators in the market, and not due to any element of actual physical demand.

"As the oil price moved down through $50 we have seen financial speculators move back into the market. These speculators do not represent actual demand for oil, they are merely seeking to make transactional profits on futures contracts because they believe that the oil price will rise. There has also been an element of short covering, again by financial speculators, as oil has moved below 50 USD," he added.

Bloomberg reported Jan.23 that In June 2014, when prices were above $100 a barrel, speculators had accumulated a record long position in oil futures. As oil tumbled, money managers sold out of their positions, adding momentum to the decline, but now, speculators are again wagering that prices will climb.

According to Bloomberg's report, during the week ending Jan. 13, hedge funds and other big money managers bought the equivalent of 24.6 million barrels on the Nymex, accumulating their biggest bullish position since August.

Barden said, "as financial speculators have come and gone from the market, and are now coming back at the $50 level, the most liquid financial contract is the Brent contract, and is where most of the financial liquidity from the speculators is entering the market. As a result, the financial demand for Brent over OPEC is pushing the Brent price up relative to OPEC, but again this is financial demand not physical demand," he said.

The International Monetary Fund released a report in December, putting the contribution of speculation to short-term oil price volatility between 3 and 22 percent.

Edited by CN

Dalga Khatinoglu, head of Trend Agency's Iran news service.

Follow him on @dalgakhatinoglu

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