Market analysis: Oman crude makes inroads in the US

Oman crude oil trading on the Dubai Mercantile Exchange during March hit fresh 2016 trading highs as prices consolidated in the US$35-38 per barrel for most of the month.

The Omani flag flies over the Bukha A oilfield off the sultanate’s shores. Pawan Singh / The National

Oman crude oil trading on the Dubai Mercantile Exchange (DME) last month hit fresh 2016 trading highs as prices consolidated in the US$35 to 38 per barrel for most of the month, though volatility ahead of the upcoming producer meeting in Doha capped the gains going into this month.

Notably, Oman crude made inroads in the US market during the month.

The monthly average price of the DME for March, which is used by Oman and Dubai to set their official selling price (OSP), was $36.34 per barrel (for May delivery), up $6.11 per barrel from the February monthly average of $30.23, or 20 per cent. Oman crude traded in a range of $32.80 to $38.43 per barrel, with the high of the month up by over 60 per cent from the multi-year low of $23.72 in January.

Initial optimism that key producers would strike a deal to curtail global production propelled prices to the highest level since early December, but Iran remains a key stumbling block to any formal agreement on reducing production, according to market watchers.

Iran returned to the global oil markets after sanctions against it were lifted in January and has ambitions to increase its oil production and exports to pre-sanction levels, whereas the Opec kingpin Saudi Arabia has made it clear on a number of occasions that an output freeze deal could be reached only if other major producers, including Iran, participate. The key oil producers are scheduled to meet in Qatar on April 17.

Crude oil demand typically softens during the second quarter of the year, as consumer countries in the northern hemisphere exit the high-demand winter months and refineries take the opportunity for maintenance during the slower months until demand picks up again in the summer. Citibank noted in a research document published this month: “Oil prices have come off mid-March highs of more than $40 per barrel (Brent) as seasonal weakness looms in the second quarter, though the second half remains constructive.”

However, demand for Oman crude oil remains healthy, with both end-users and traders buying up May-loading cargoes throughout last month, and the DME recorded its second-highest monthly physical delivery with more than 23 million barrels scheduled for delivery through the DME mechanism during next month.

Trading and shipping sources have also noted the re-emergence of shipments of Oman crude to the United Statesthis year, something that had not happened for three years. At least two Very Large Crude Carriers (VLCCs) – the supertankers that carry Middle East crude to refineries across the world – have been chartered to ship Oman crude oil to the US, and US trading companies and refiners are said to be looking at further buying opportunities. A VLCC can hold about 2 million barrels of crude oil, which is about two days’ worth of Oman crude production.

The re-establishment of this trade route comes after the US president Barack Obama’s historic decision to lift the 40-year export ban on US crude, which has boosted the relative value of the US benchmark WTI crude. Technological advancements and strong crude prices between 2010 and 2014 led to a sharp rise in US crude oil production, but the US remains the largest importer of crude oil, including Middle East crude that is typically used as a blend with the lighter shale crude produced in the US.