A strong finish to the month lifted Oman crude oil prices on the Dubai Mercantile Exchange from multiyear lows to levels above US$30 per barrel, as hopes grew over a production cut agreement among the world’s major producers to help tackle the global supply glut.
However, prices generally remain under pressure as market watchers cast doubts on the likelihood of a production cut by top producers such as Saudi Arabia and Russia, while bearish data from China is likely to keep a lid on any significant price recovery – at least in the short term.
The monthly average price of the DME for January, which is used by Oman and Dubai to set their official selling price (OSP), was $27.40 per barrel for March delivery. It fell by $7.19 from the December monthly average of $34.95, as prices tumbled below $25 for the first time in more than a decade.
Oil markets in the Middle East started the new year from exactly where they left off last year, recording sharp losses in the first three weeks of the month. But talk of cooperation by the producer giants Saudi Arabia and Russia on curbing output lifted oil prices by about 25 per cent in the final week of the month.
Oman crude climbed to about $31.50 at the start of February but will struggle to hold above $30 until clearer details emerge on plans to reduce output.
In signs that Opec’s long-term strategy of forcing out high-cost production crude is working, the consultants Wood Mackenzie said that at $30 per barrel, many fields will become uneconomical.
The consultant said that $380 billion in major oil projects have been delayed or cancelled since the oil price collapse. It also calculated that about 27 billion barrels slated for production from those projects will no longer be produced.
US crude output continued to decline with the latest production figures reported at 9.22 million barrels per day, down from last June’s 40-year high of 9.61 million bpd, and some analysts are forecasting US output to drop by up to 500,000 bpd this year if prices remain depressed.
US shale producers had been partly protected from the price collapse having pre-sold oil when values were much higher, but with many of these so-called “hedges” ending or close to ending they will be fully exposed to new lower prices.
Iran remains the wild card on the production side with opinion divided about how quickly Iran can crank up exports, with its creaking infrastructure needing major investment and upgrading after years of sanctions.
Meanwhile, demand for the benchmark Oman grade remains robust with the DME setting a new record for physical delivery volumes of 27.3 million barrels for March loading, breaking the previous record of 22.5 million barrels set in March last year, and four successive open interest records for its Oman crude oil futures contract peaking at 36,109 contracts.
Traded volumes also increase by 17 per cent year-on-year at the exchange amid strong interest in the DME Oman contract from commercial and financial firms around the world.
Paul Young is the head of energy products at the DME