Oman crude oil trading on the Dubai Mercantile Exchange continues to reflect the bearish mood that persists on global markets.
Yesterday, the new front-month October DME contract’s marker price stood at US$50.61 per barrel, the lowest since January.
Even last month prices moved sharply as the potential lifting of Iranian sanctions and buoyant Opec production heightened fears of an oversupply for the remainder of the year.
In addition, the Greek credit crisis, turmoil in the Chinese stock market, plus persistently high United States production and the strong US dollar all combined to form the perfect storm to force prices lower.
The monthly average price of the DME for July, which is used by Oman and Dubai to set their official selling price was $56.33 per barrel, down $5.51 or 9 per cent from the June average of $61.84. September-loading Oman crude closed at $52.55, a 12 per cent drop from the contract settlement price in June, the biggest monthly fall since January.
The summer losing streak has resulted in Oman crude prices falling nearly $15 per barrel from the May peak of more than $66, as strong supply and tepid demand growth tilt the market back to the downside.
Oil prices came under strong downwards pressure as Iran struck the deal with world powers that allows for an increase in crude exports.
The immediate threat to supply/demand fundamentals comes from the release of Iran’s estimated 30 million to 40 million barrels of storage – although observers noted much of this is heavy condensate which is only attractive to a limited pool of buyers.
Most analysts agree that any significant production increases will not come until at least 2016 because of the required infrastructure investment needed in Iran’s upstream system, but a number of European majors are said to have held preliminary talks on Iranian projects.
A Reuters poll from leading banks and brokerages forecast that Iran would be able to raise crude oil output by between 250,000 and 500,000 barrels per day by the end of this year and by up to 750,000 bpd by the middle of next year.
But this has not deterred Opec members from collectively increasing output to multi-year highs, noted the latest Reuters survey. The producer group increased output to a little more than 32 million bpd in July, a level not reached since 2008, when Oman crude prices peaked above $140 per barrel. The figure included a record of 3.06 million bpd from southern Iraq last month.
Opec is banking on the demand side picking up, but lower prices this year have yet to yield any significant rise in buying, as demand growth continues at a modest pace. July's turmoil in the Chinese equities market has yet to factor in oil demand, but any further slowdown in China's industrial sector will certainly dampen its appetite for oil.
However, Middle East crude performed well in relation to its European counterpart, with the Brent/Oman spread averaging about $1 per barrel last month, compared with more than $2 in June. The narrower Brent/Oman spread is likely to continue this month, according to market watchers, as Chinese companies buy key Middle East grades such as Dubai, Oman and Abu Dhabi’s Upper Zakum.
Paul Young is the head of energy products at DME.
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