From the October 2013 issue of Futures Magazine • Subscribe!

Got volatility? Use OTC markets as a guide to arbitrage

Moving beyond hypotheticals, medium sour Kirkuk flow into the Mediterranean via the Kirkuk-Ceyhan pipeline continues to be the victim of constant bombing and sabotage by local militants. There have been seven attacks on the pipeline to date in 2013.  

Middle East and North African crude grades likely will remain constrained going into the end of the year.  

In the North and Baltic seas, medium sour Russian Urals continues to flow through Primorsk, Ust-Luga and Novorossiysk. Primorsk likely will see decreasing export volumes as the “ice premium” begins to set in, making lifting from the port less attractive than its southern neighbor Ust-Luga. Through the summer and fall however, the former Soviet Union is taking full advantage of the current fear in the market and has increased export volumes in September from Primorsk and Ust-Luga by 25% and 32% over August loading programs, respectively.  Comparatively, September exports from the Baltic port of Novorossiysk are up only 9.1% from August, according to Bloomberg data.  

The continued loss of Libyan grades on the market has caused medium sour and light sweet supplies in the Mediterranean to tighten moving into the fourth quarter. The temporary disruption opened the arbitrage of North Sea Urals cargoes to make their way into the Mediterranean for French and Italian delivery (see “Here’s the upside,” below).

Urals into the Mediterranean via Novorossiysk is at further risk according to recent statements from Rosneft. The Russian state-owned giant has hinted that they are open to reversing the Baku-Novorossiysk pipeline and leaving the crude in Azerbaijan for refining. Azerbaijan’s state energy company, SOCAR, has been in talks with Rosneft to reverse the flow of oil five million tons per year, roughly 38 million barrels, allowing SOCAR to refine the crude domestically. According to August press reports, Russian pipeline monopoly Transneft may not approve the deal; however, Urals supply, particularly to the Mediterranean, remains uncertain.  

Trading opportunities in the global crude oil and product markets should continue as volatility on the world’s crude oils rises from yearly lows into the balance of the 2013. 

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