Oman crude oil trading on the Dubai Mercantile Exchange continued to bounce around multi-year lows last month, with the market reaching a stalemate as wider economic uncertainty largely countered signs that US oil production is increasingly curtailed by this year’s low prices.
The monthly average price of the DME for September, which is used by Oman and Dubai to set their official selling price, was $45.76 per barrel, down 4 per cent or $2.12 from the August average of $47.88, as spot prices hovered around $45 in the latter part of the month. The contract for November-delivery crude closed at $45.01, about $1.50 down from the previous month’s close.
Uncertainty in the global financial markets, and particularly in the commodities sector, has generally cast a gloomier outlook for oil in the short-to-medium term. China's worsening economic slowdown is seen as particularly bearish for oil prices, as it is likely to maintain the oversupply even if, as expected, production from the US and other expensive production fields continues to erode. At prices below $50, a number of analysts have forecast that enough oil production will come off the market, which will allow for a demand/supply rebalancing and a gradual price rebound in 2016.
However, forecasters are reducing price outlooks including a survey of 13 investment banks by The Wall Street Journal, which collectively cut their average forecast for Brent crude by $9 to $58.70 per barrel, compared with last month's survey, with only three of the banks expecting Brent to rise above $70 per barrel in 2016. Brent is used as the European benchmark to gauge oil prices, and is currently trading at around $3 per barrel over Oman, so the forecast puts typical Middle East crude at around $55.
Likewise, the monthly survey from Reuters concluded Brent crude is expected to average $58.60 per barrel in 2016, slightly above the $56.63 so far this year but well below the forecast of $62.30 in last month’s poll in a survey of 31 analysts.
US oil production continues to trend downwards, with the latest figures putting output at a nine-month low of 9.1 million barrels per day – and further falls are expected.
The consultant Wood Mackenzie, which is a global leader in production analysis, said in a recent report that about $1.5 trillion of potential investment in global new oil projects is not viable with crude prices at $50 per barrel, highlighting the need to reduce costs.
The consultants said the “at risk” proposed projects, including spending on North American shale, are “now out of the money and uneconomic at $50 per barrel”.
The rebalancing in supply/demand economics will give some comfort to Saudi Arabia in its policy of maintaining market share and, in the long, run forcing out high-cost producers and so avoiding a future oil glut. Some market watchers have suggested Opec itself may rein in production at some point in 2016, but would probably look for support from non-Opec members such as Russia and Mexico.
The new front-month December contract settled on Friday at $45.22, maintaining the recent stability in the market and lending support to the case that prices have largely bottomed out at current levels. In the forward market, Oman prices for one year out were trading around $52.
Paul Young is the head of energy products at the DME.
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