Oman crude hits milestone despite softening

The price of oil stayed above US$100 for two years in a row.

A pumpjack drills for oil. Lucy Nicholson / Reuters
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Last month the Dubai Mercantile Exchange reached a significant milestone – the price of oil stayed above US$100 for two years in a row.

The official selling price (OSP) of Oman crude oil for September was set at $106.24, which was determined from the average settlement prices on the exchange in July.

Commenting on the Oman OSP, the senior Reuters oil and commodities analyst, Clyde Russell, said China was still a key market driver behind strong oil prices. “One reason oil prices have held up so well is China’s demand has grown strongly; in the third quarter of 2012 it was about 4.8 million barrels per day, but in the second quarter of this year it was 6.1 million bpd,” he said, noting that the price of Oman crude “is generally one of the best indicators of dynamics in Asian oil markets”.

The 24 consecutive months above $100 a barrel is seen as part of a wider trend going back more than three years, which has seen Oman crude consolidate in the $100 to $110 range.

“It’s worth noting that prices [of Oman OSP) haven’t had many months averaging above $110 a barrel, either, meaning they have been in a narrow range, despite the numerous political risk concerns, such as conflict in Iraq, Libya, Sudan and Syria. The risks are keeping oil above $100 a barrel, the supply growth is keeping it below $110 a barrel,” Mr Russell added.

The Oman price for September delivery crude ranged from $104.54 on July 21 to a high of $109.17 at the start of last month, as geopolitical tensions once again dominated trends – particularly the unstable political situation in Iraq and the downing of Malaysian Airline flight MH17 over Ukraine. The market is also increasingly losing faith in Libya’s ability to restore reliable oil exports.

However, oil prices generally trended lower over the month as the unrest in Iraq failed to have any impact on the key oil production and exporting regions in the south of the country.

A report from Reuters said that Iraq’s oil exports from its southern terminals in July rose to a near-record rate of about 2.5 million bpd, just shy of the 2.58 million bpd reached in May – which was the highest since 2003.

The Oman crude contract peaked at a nine-month high of $111.18 on June 23 on fears that fighting would slow down Iraq’s oil exports, but prices have retreated with exports unaffected, while sluggish demand for crude among Asian refiners also hit prices. Refining margins remain poor, while the third-quarter maintenance season is also curtailing refiner’s appetite for crude oil.

Most grades of Middle East crude oil including Abu Dhabi’s Upper Zakum and Murban – both seen as key value indicators in the wider market – were trading at discounts to the OSP throughout last month.

Brent, the European benchmark crude, fared even worse during July, losing around 10 per cent of its value. The Brent premium over Oman had reached as much as $4 a barrel during June, but retreated to below $1.50 a barrel by late July, the narrowest spread between the grades this year.

The new front-month October contract on the DME resumed the softer market trend, settling last Friday at $104.63.

Paul Young is the head of energy products at DME

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