The strong upwards momentum seen in crude oil markets since early this year initially carried into May as concerns over the conflict in Yemen destabilising the region underpinned prices, hitting a 2015 high of US$66.55.
Continuing unrest in Libya, including oil tankers being targeted in the bitter dispute between rival factions, also underpinned prices last month.
But with Saudi oil production at a multiyear high of well over 10 million barrels per day and US production at its highest since the early 1970s, the oil price rally finally ran out of steam.
Additionally, the strong dollar, which gained about 2.5 per cent against a basket of other major currencies in May made US dollar-denominated oil more expensive for holders of other currencies – which typically dents demand.
Oman crude oil trading on the Dubai Mercantile Exchange (DME) hit a five-month high of more than $66 per barrel last month before easing off during the second-half on concerns of a possible oversupply in the market and the strength of the US dollar.
The monthly average price of the DME for May, which is used by Oman and Dubai to set their official selling price was $63.62 per barrel. It was up more than 8 per cent from the April average of $58.68 – and the highest since December. July-loading Oman crude closed at $61.62, a small drop from the $62.95 contract settlement price in April.
Looking ahead to the Opec meeting later this week in Vienna, Saudi Arabia is widely expected to stick with its policy of maintaining market share, supported by its GCC allies looking at the longer-term strategy of keeping supply-demand fundamentals in check.
Discussion points for Opec are likely to include accommodating growing exports from Iraq, plus the possible easing of sanctions against Iran. On the demand side, despite slower GDP growth in China, oil purchasing remain healthy with crude imports hitting a record 7.4 million barrels per day in April.
Asian refinery margins generally remain healthy, and June-loading Middle East cargoes found no shortage of buyers despite the increased exports.
Beyond the Opec meeting, the markets will also be looking at wider economic fundamentals, namely Greece's possible debt default and subsequent impact on the currency and financial markets, plus Iran's nuclear deal, which would potentially lead to a sharp hike in Iranian oil exports later in the year.
The new front-month August-delivery DME contract ended the month on a strong footing, with a late rally spurred by a weaker dollar and oil-rig data from the US keeping Oman crude prices well above $60. US oil production is still on the increase but with the number of operational drilling rigs falling every week for the last half year, many analysts expect production to peak by the end of the year and ease back in 2016.
Paul Young is the head of energy products at DME.
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