Upload
syed-ahsan-ali
View
221
Download
0
Embed Size (px)
Citation preview
7/27/2019 PMEX Crude Oil Report
1/13
PMEX
Crude Oil FuturesBRENT|WTI
September 2013
Pakistan Mercantile Exchange Limited9th Floor, PRC Tower, 32-A Lalazar Drive, MT Khan Road, Karachi.
Voice: +92 21 111 623 623, Fax: +92-21-5611263, 5610505
Email:[email protected], website:www.pmex.com.pk
mailto:[email protected]:[email protected]:[email protected]://www.pmex.com.pk/http://www.pmex.com.pk/http://www.pmex.com.pk/http://www.pmex.com.pk/mailto:[email protected]7/27/2019 PMEX Crude Oil Report
2/13
INTRODUCTION
Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural
underground reservoirs. Crude oil greatly varies in appearance depending uponits composition. It is usually black or dark brown. Petroleum is used mostly, by
volume, for producing fuel oil and petrol both important primary energy sources.
Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil,
residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke,
asphalt and other products are obtained from the processing of crude and other
hydrocarbon compounds.
Almost all industries including agriculture are dependent on oil in one way or
other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides,
paints, perfumes, etc. are largely and directly affected by the oil prices.
GLOBAL CRUDE OIL SCENARIO
The upstream oil industry in its nature is an international market. The prices of oil
are driven internationally and representative prices are quoted in US dollars.
Almost all deals are priced in US dollars.
Saudi Arabia, Russia, US, Iran and China are the top five oil producing countries.
The world oil production in 2012 was 89.15 million barrels per day. The total
proven oil reserves according to 2012 OPEC (Organization of Petroleum
Producing Countries) estimates are around 1.48 trillion barrels, of which OPEC
member countries hold around 72%.
The given below data of world consumption and production shows that since year
2009 until 2011 the demand had slightly outpaced the supply but that trend ended
in year 2012 when the production was more than the consumption.
World Production & Consumption
Year Production ConsumptionMillion barrels per day
2009 84.58 84.76
2010 87.07 87.36
2011 87.34 88.56
2012 89.15 88.88
7/27/2019 PMEX Crude Oil Report
3/13
In the global oil trade on the supply side OPEC plays an important role and on the
demand side the economic growth & consumption patterns of top oil consuming
countries play an important role. The top five countries with respect to
production, consumption, import and export are:
World Ranking of Countries
Rank Production(2012) Consumption(2012) Import(2010) Export(2010)
1 S. Arabia(11.5) US (18.5) US (9.2) S. Arabia (6.8)
2 US (11.1) China (10.3) China (4.7) Russia (4.9)
3 Russia (10.4) Japan (4.7) Japan (3.5) Iran (2.4)
4 China (4.4) India (3.6) India (3.3) Nigeria (2.3)
5 Iran (3.5) Russia (3.2) S. Korea (2.4) UAE (2.1)
Numbers are in million barrels per day.
The Organization of Petroleum Exporting Countries (OPEC)
OPEC is a major player of global oil arena. The current members of OPEC are
Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia,
UAE and Venezuela. The OPEC countries produce about 41 % of the world's crude
oil and its exports represent about 57% of the crude oil traded internationally.
Therefore, OPEC can have a strong influence on the oil market, especially if it
decides to reduce or increase its level of production.
The OPEC member countries meet at least twice a year to co-ordinate their oilproduction policies in light of the market fundamentals, such as the likely future
balance between supply and demand.
The International Oil Pricing
The crude oil is a most active internationally traded commodity. Oil prices are
quoted in US dollars and almost all transactions are priced in US dollars
irrespective of their production origin. Although the oil prices are widely
influenced by the production decisions of OPECs member countries but the prices
are not set by them. In today's complex global markets, the price of crude oil is set
by movements on the two major international petroleum exchanges NYMEX and
London based International Petroleum Exchange (IPE). The NYMEX and IPE have
respectively been merged with Chicago Mercantile Exchange (CME) and
Intercontinental Exchange (ICE).
There are two major international pricing benchmark contracts, ICE Brent Crude
Oil and NYMEX Light, Sweet Crude Oil futures contract (WTI).
7/27/2019 PMEX Crude Oil Report
4/13
BRENT:ICE Brent Crude Futures is currently the worlds largest crude oil futures
contract in terms of volume. As the average North Sea crude oil output is currently
around two million barrels per day (bpd) and the Brent-Forties-Oseberg-Ekofisk
(BFOE) basket comprises an approximate one million bpd (around 700k bpd
during the 2012 summer maintenance period), making it the largest underlying
physical market of any comparable traded and transparent benchmark.
Approximately two-thirds of the worlds traded crude oil uses the Brent complex,
which includes ICE Brent futures with its deep liquidity and far-reaching forward
curve, as a price benchmark. Many national oil producers and other participants
around the world price crude at a differential to Brent, depending on the crude
grade. Factors such as Brents accessibility and reach as a seaborne crude,
production, adaptation to changing global economics in the oil market, stabilityand geographic location have consolidated Brents global benchmark position and
contributed to physical participants, such as international airlines and oil
producers in Asia, adopting Brent as a primary hedging tool.
WTI: NYMEX Light, Sweet Crude Oil futures contract is the world's second most
liquid forum for crude oil trading, and the world's second largest-volume futures
contract trading on a physical commodity. Because of its excellent liquidity and
price transparency, the contract is still used by many as a principal international
pricing benchmark.
Price difference between Brent & WTI:
The Brent-WTI spread, the difference between the prices of Brent and West Texas
Intermediate (WTI) crude oils, has narrowed considerably over the past several
months. The spread, which was more than $23 per barrel ($/bbl) in mid-February,
fell to under $9/bbl in April, and has ranged between $6/bbl and $10/bbl since
then.
The narrowing of the spread is supported by several factors that have:
Lowered Brent (North Sea) prices because Brent-quality crude imports intoNorth America have been displaced by increased U.S. light sweet crude
production, reducing Brent-quality crude demand.
Raised WTI (Cushing, Oklahoma) prices because the infrastructurelimitations that had lowered WTI prices are lessening.
7/27/2019 PMEX Crude Oil Report
5/13
Before 2011, Brent and WTI crude oil prices tracked closely, with Brent crude oil
prices typically trading at a slight discount to WTI crude oil, reflecting delivery
costs to transport Brent crude oil and Brent-like crude oil into the U.S. market,
where they competed with WTI crude oil. In early 2011, this longstanding
relationship began to change, and since then, WTI crude oil has priced at a
persistent discount to Brent crude oil. Increased U.S. light sweet crude oil
production combined with limited pipeline capacity to move the crude from
production fields and storage locations, including Cushing, Oklahoma, the
delivery point for the Nymex light sweet crude oil contract, to refining centers put
downward pressure on the price of WTI crude oil.
More recently, expansions in U.S. crude oil infrastructure have eased the
downward pressure on the price of WTI. Since mid-2012, significant pipeline
takeaway capacity has been added at Cushing, enabling crude oil to flow to and
from the trading hub more easily. Other pipeline and rail projects have also beencompleted, making it possible to move barrels from production areas, such as
Texas and North Dakota, to refinery centers without passing through the hub.
Even U.S. East Coast refineries, which historically have relied on Brent crude oil
and Brent-like crudes, can now access U.S. light sweet crude oil. U.S. crude that
moves by rail is replacing Brent crude oil and Brent-like crude oil imports into the
U.S. East Coast, putting downward pressure on the price of Brent crude oil and
narrowing the differential versus WTI crude oil.
The future of the Brent-WTI price spread will be determined, in part, by the
balance between future growth in U.S. crude production and the capacity of crude
oil infrastructure to move that crude to U.S. refiners. The International Energy
Agency (IEA) reported that planned maintenance in the North Sea oil fields this
summer will reduce production, adding upward pressure to Brent prices and
potentially widening the Brent-WTI spread. In its June 2013 Short-Term Energy
Outlook, EIA forecast the Brent-WTI price spread to average $11/bbl in 2013 and
decline to an average $8/bbl in 2014.
7/27/2019 PMEX Crude Oil Report
6/13
Factors Affecting International Oil Prices
Current supply in terms of output, especially the production quota set byOPEC. The OPEC cartel provides 57% of oil traded internationally.
Oil reserves, including what is available in U.S. refineries and what isstored at the strategic reserves
International economic growth, particular from US and developing Asiannations influence the oil demand.
New developments in alternate energy technologies i.e. shale oil, solar, etc. During summer forecasts for travel. During winter weather forecasts are used to determine home heating oil
use.
Potential world crises in oil-producing countries can also substantiallyinfluence oil prices.
Almost all oil deals worldwide are priced in US dollars. Therefore theweakening and strengthening of US dollars also affect oil prices.
In the recent years the speculative trading and investments formcommodity funds have also become a factor that has the potential to
influence oil prices.
PAKISTAN
The energy sector has a vital role in Pakistans economy. The sector by farattracts the highest foreign direct investment and raises substantial revenue for
the exchequer. However at the same time high imports of crude oil and
petroleum products affect the balance of payments adversely.
Until 1999 the oil and gas sector was tightly controlled by the government. Since
early 2000 a pro-market reform process was started. Oil and Gas Regulatory
Authority (OGRA) was established to regulate the sector. Under the current
pricing regime of petroleum products, prices are revised every fortnightly based
on the international pricing.
Pakistans total crude oil reserves are around 264 million barrels. In FY 11
Pakistans total production of crude oil was 24 million barrels while imports of
crude oil were 49.6 million barrels. The total petroleum product consumption in
FY11 was 18.8 million tonnes. Pakistan spends a substantial amount on the
import of crude oil and other petroleum products. In FY 11 Pakistan imported
crude oil of worth US$ 4.69 billion and petroleum products of worth US$ 8.51
7/27/2019 PMEX Crude Oil Report
7/13
billion. Pakistan imports most of the crude oil and petroleum products from
Middle East and Iran.
Consumption Pattern of Petroleum Products
The transport sector is the largest user of petroleum products (47 percent),
followed by power (43 percent); industry accounts for about 7 percent, and the
balance is used in other sectors.
Petroleum Sector Structure
Pakistans petroleum sector operates under the Ministry of Petroleum and
Natural Resources which is responsible for dealing with all matters relating topetroleum, gas mineral. The Oil & Gas Regulatory Authority (OGRA) regulates
the sector and pricing of all petroleum products are determined by OGRA. We
can broadly explain the structure of petroleum sector through the following
diagram.
Pakistan
Petroleum Sector
Oil Exp &
Production Cos
Crude and Petro
Products Imports
Refineries OMCs Consumers
7/27/2019 PMEX Crude Oil Report
8/13
There are around eleven oil exploring and producing companies are operating in
Pakistan and they are producing around 66 thousand barrels per day. There are
seven refining companies with refining capacity of 13 million tonnes per annum
are operating. In the oil marketing sector twelve OMCs are operating with over
60% share of PSO.
Indigenous Production & Crude oil Processed by Refineries
Year Production Processed
2008 3.43 11.97
2009 3.22 11.00
2010 3.18 10.10
2011 3.22 10.00Processed figures include imports. Unit: million TOE
IMPORT OF CRUDE OILUnit: Qty. in Tonnes
(Value in Million US$
Year 2007-08 2008-09 2009-10 2010-11
Refinery Qty Value Qty Value Qty Value Qty Value
BYCO 790,760 551 875,233 496 632,732 351 491,922 329
PRL 849,852 568 1,304,743 596 979,604 552 929,885 638
NRL 2,223,469 1,519 2,317,995 1,172 1,711,581 956 1,927,662 1,306
PARCO 4,559,532 3,104 3,562,684 1,980 3,564,378 1,992 3,308,563 2,413
TOTAL: 8,423,613 5,742 8,060,655 4,244 6,888,295 3,851 6,658,032 4,686
7/27/2019 PMEX Crude Oil Report
9/13
IMPORT OF PETROLEUM PRODUCTSUnit: Qty. in Tonnes
Value in Million US$
Year 2007-08 2008-09 2009-10 2010-11
PRODUCTS Qty. Value Qty. Value Qty. Value Qty. Value
100/LL 121,499 123 253,024 162 606,163 419 802,971 723
HSD 4,507,873 3,863 4,395,427 2,862 4,394,888 2,725 3,777,500 3,063
High Sulphur F. Oil 3,921,425 1,914 5,077,096 2,022 5,600,120 2,579 5,597,137 3,121
Low Sulphur F. Oil 346,906 200 - - - - 1,063,590 628
Motor Spirit 127,386 106 248,637 151 576,929 422 1,129,689 971
TOTAL: 9,025,089 6,206 9,974,184 5,197 11,178,100 6,145 12,370,887 8,506
Exports of Crude oil & Petroleum Products
FY 08 FY 09 FY 10 FY 11
Qty Value Qty Value Qty Value Qty Value
Crude Oil - - - - - - - -
Petroleum
Products 1,337,338 1,210 1,211,731 823 1,449,972 1,107 1,573,255 1,530Qty in TOE, Value in million US$
PETROLEUM PRICING REGIME IN PAKISTAN
The price deregulation process was initiated in 2000, when the government
adopted a market-based price framework. FO prices have been completely
deregulated since July 2000, while the HSD market was partially deregulated in
2002. Retail prices of other products are regulated in accordance with the price
framework set by the government and comprise import parity price (IPP),
allowable margins (OMC margin, freight margin, and dealer's commission), and
taxes (petroleum levy/surcharge, sales tax). Prices are adjusted every fortnight inaccordance with changes in international market prices.
Import Parity Price (IPP)
Import Parity Prices are calculated as to reflect as closely as possible the "true"
cost of imports and are based on a 15 day average Arab Gulf C&F prices plus a
number of incidentals.
7/27/2019 PMEX Crude Oil Report
10/13
Ex-Refinery Prices
Domestic refineries benefit from a protective duty (6-10 percent) on four main
products namely HSD, Kero, LDO, JP-4, 24. Ex-refinery prices are equal to IPP
for all products except the above four for which an element of 6-10 percent
protective duty is embedded in the ex-refinery price.
Inland Freight Margin
The inland freight margin is set to recover the total primary freight cost for
pipelines, rail and road transportation of petroleum products and to equalize
prices throughout Pakistan. The margins account for the cost of freight from
supply sources to the primary depots, and are averaged into a single freight
margin in the price structure. The secondary freight (depots to retail outlets) has
been deregulated and its cost is recovered from end-consumers by each OMC.
OMC Margin and Dealer CommissionsOMC distribution margins and dealer commissions are capped respectively at
3.5% and 4% of the maximum selling price (as set fortnightly). OMCs and dealers
are allowed to provide discounts from the maximum selling price (that is, offer
discounts on the capped margins) as part of a strategy to expand their market
share.
TaxationPetroleum levy/surcharges vary by product, and reflect the fiscal targets of the
government, relative consumption volume, and socio-political considerations(kerosene and diesel are taxed at lower rates as compared to motor gasoline).
Under the current pricing regime petroleum levy has been set at the rate of Rs.10
per liter on petrol, Rs.8 per liter on high-speed diesel, Rs.14 per liter on high
octane, Rs.6 per liter on kerosene oil and Rs.3 per liter on light diesel oil.
Subsidies
Under the current pricing regime no subsidy is being given to the consumers.
However under the influence of socio- political considerations the government
sometimes comes under pressure to provide subsidies. In 2008 when crude oil
prices were at its historical highs, GOP did not pass on the high prices to theconsumers and took the burden on its own kitty. The government provided
subsidy to the tune of around US$ 5 billion.
7/27/2019 PMEX Crude Oil Report
11/13
PMEX CRUDE OIL FUTURES
Keeping in view the emergence of ICE Brent Crude Oil as the international
pricing benchmark and also the import of crude oil by Pakistan is based on Brent
Crude Prices, PMEX is in the process of listing another Crude Oil futures contractbased on the ICE Brent Futures in addition to the already listed Crude oil
contract based on CMEs WTI Futures contract.
Futures are primarily used to mange the price risk of the underlying commodity.
It transfers the price risk form those who are risk averse (hedgers) to those who
are ready to take the risk (speculators). Both PMEXs Crude Oil Futures
Contracts (Brent & WTI) are cash settled contracts in Pak rupee. However the
price quotation is in US dollars which will provide the local market participants
an international flare and ease of trading as the crude oil is not only quoted in
US dollars but almost all intl deals are priced in US dollars.
The key market players hedgers, investors and speculators play their important
and due role for the success of any futures market. There are three broad
segments of participants who will participate in the trading of Crude oil futures
listed at PMEX
1. Existing Investors of Unregulated Forex Houses
PMEXs first target for its crude oil futures is to attract those investors who are
currently trading crude oil futures through unregulated forex houses. PMEXwill provide them a safe, secure, transparent and convenient trading platform.
Currently these forex houses transmit huge sums of foreign exchange to their
foreign counterparts to enable their local investors to trade in crude oil or other
commodities. As these houses are not regulated by any authority, at times they
close their operations and disappear, depriving investors of their money.
With the listing of this contract, PMEX will bring these investors under the
umbrella of a regulated and documented marketplace and above all, foreign
exchange outflows will reduce. We have been observing since the introduction of
Gold, Crude Oil and Silver that a number of investors from these houses have
shifted their trades to PMEX. The pace of joining a regulated marketplace by
these investors will substantially increase with the availability of complete basket
of commodities at PMEX.
PMEX will be providing a service where needs of domestic stakeholders can be
met from within the country as opposed to relying directly on foreign markets.
7/27/2019 PMEX Crude Oil Report
12/13
This is an important step towards the countrys self reliance and growth, namely
the ability to fulfill needs from own resources from within the country as much
as possible.
2. New Investors/Day Traders
A large number of new investors are also interested to trade in crude oil futures
as they do not want to trade through above described forex house. Trading
through these houses is not only inconvenient but also carries a huge credit
default risk. As such PMEX will be able to attract a large number of new
investors/ day traders at its platform for crude oil trading.
3. Corporates
Number of companies, both in public and private sector are exposed to price risk
of crude oil or on the products derived form crude oil. Some of these companies
are in the following sectors:
Airlines Power generation Big transport companies Refineries Oil Marketing Companies
Most of these companies are interested to hedge their price risk volatility. At the
moment public sector companies are not allowed to participate in hedging. Thereason may be that no local rupee based hedging instrument was available. They
are now interested to participate in the PMEX rupee settled crude oil futures.
However their point of view is that once PMEX will list the crude oil futures then
they would approach Ministry of Finance to get the permission for hedging. The
private sector companies have no such regulatory requirements.
We believe that a lot of interest from corporate sector will arise after the listing of
Contract based on ICE Brent Crude Oil Futures at PMEX.
7/27/2019 PMEX Crude Oil Report
13/13