Market analysis: Some pressure lifts off Oman crude prices

Prices picked up slightly at the end of the month and the fall in rig count in the US bodes well for a price increase.

Oman crude recovered with a strong finish in January trading activity. Pawan Singh / The National

Oman crude oil trading on the Dubai Mercantile Exchange continued its sharp downtrend into 2015 with heavy losses recorded during the first few days’ trading of the March delivery contract. But after having consolidated around lows of US$45 per barrel, it was showing signs of recovery with a strong finish in the last few hours of January trading activity.

Last month’s average price of the DME, which is used by Oman and Dubai to set the official selling price (OSP) was $46.73 a barrel, down $14.28 or 23 per cent from the December monthly average of $61.01, which in turn was $17.23 or 22 per cent down from November’s average of $78.24.

The March contract expired at $45.98, which was lower than about 55 per cent from the corresponding expiry last month. A Reuters poll published at the end of January said that oil prices were set to average even less in 2015 than during the global financial crisis of 2008-09.

The monthly survey of 33 economists and analysts forecast the European benchmark Brent at $58.30 a barrel – which would be the lowest average annual price in a decade.

Brent typically trades at a premium over Oman and in recent months the Brent-DME Oman spread has averaged around $3 per barrel, so the Reuters poll suggests an implied Oman price of about $55.

Oil prices rebounded sharply on Friday on reports that low prices were already having a significant impact on the US oil industry and the new front-month April contract rallied to over $50 a barrel, a gain of about 8 per cent in the space of a few hours.

A report from the oil services company Baker Hughes showed that the number of oil rigs in the United States fell by 94 (or 7 per cent) in the past week, the biggest weekly drop since it started compiling the data in 1987.

The rig count is considered a key indicator of future production and the latest data is viewed as clear evidence that producers of US shale oil are sharply curtailing activity, particularly on future projects.

Baker Hughes said that US drillers have now idled around 24 per cent of their rigs since last summer.

Towards the end of the month prices were also supported after the Opec secretary general, Abdalla El Badri, said oil prices may have bottomed out and warned of a sharp increase in prices if future investment on projects were scaled back too far.

Beleaguered Middle East producers have generally seen an uptick in demand since the start of the year, as lower crude prices have boosted the relative value of refined products and improved profitability for refiners.

“Asia continued to enjoy favourable margins, staying well ahead of its counterparts. In contrast, margins in Europe and the [US] have been placed on a downward trend,” said KBC Energy Economics in its latest oil market outlook.

Additionally, traders have been taking advantage of lower prompt prices and the steep contango structure to store crude oil to sell at a later date.

Contango is market jargon for when prices of oil for delivery in the future are higher than current spot prices, making it attractive for trading companies to store the oil and sell at a later date.

The healthier demand has also been reflected in the premiums that buyers are prepared to pay for Middle East crude.

Regional grades – such as Murban and Upper Zakum from Abu Dhabi and Iraq’s Basrah – have all been trading at strong premiums to the OSPs – levels that have not been reached since oil prices went into freefall last summer.

Paul Young is the head of energy products at DME

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