Oman crude oil trading on the Dubai Mercantile Exchange last month rebounded strongly from the multiyear lows recorded in January, pushing towards the US$60 per barrel range and recording its largest gain since the summer of 2009.
The monthly average price of the DME for February, which is used by Oman and Dubai to set their official selling price (OSP) was $56.21, up 20 per cent from January’s $46.73. The contract for April-loading Oman crude closed last Friday at $58.67, a gain of nearly 35 per cent from ow of $43.35 in January.
The strong price recovery was initially triggered by a report on the last trading day of January from the oil services company Baker Hughes, which showed that the number of rigs drilling for oil in the United States fell by 94, or 7 per cent, in a single week – the biggest weekly drop since it started compiling the data in 1987.
The rig count is regarded as a key indicator of future production and the data was viewed as clear evidence that producers of US shale oil are curtailing activity, particularly on future projects.
At the time, Baker Hughes said that US drillers had idled about 24 per cent of their oil drilling rigs since last summer, and subsequent weekly reports have showed further declines.
However, analysts are divided on the impact of the sharp slowdown in rig activity as the latest figures revealed US oil production recently hit 9.2 million barrels per day in February – the highest since 1973 – suggesting that rig activity will have more of a long-term impact.
Comments from key Opec figures also helped the market settle at the higher levels. The Saudi oil minister Ali Al Naimi said late last month: “markets are calm now … demand is growing”.
Likewise, the Kuwait minister called an end to the market lows earlier in the month, noting: “I think it will last [the rise in prices]. It will start holding gains now and hopefully in the second half of 2015 we will see better prices.”
Oil prices had dropped by more than 60 per cent from last June’s peak of $111 per barrel and the new lower price environment has resulted in the return of significant volatility, with 2015 already recording a number of days when prices have moved by more than 5 per cent.
On the downside for global oil prices high stock levels around the world – particularly in the US – continue to cast a shadow over the market. Also the relatively strong dollar typically acts as a cap against further gains, since most international oil trade is dollar-denominated.
However, crude markets in the Middle East and Asia were also helped by the strong performance of refined products such as gasoil and fuel oil, boosting refining margins and therefore demand for crude. Cargoes such as Adnoc’s Upper Zakum and Qatar Marine have been trading at a premium to the OSP, prompting expectations that OSPs are set to rise.
But despite the stronger prices in February, some Opec members are pushing for an extraordinary meeting in April, which some analysts believe could trigger a concerted effort by members to cut production and help to tackle the overhang of crude.
Opec output actually dropped slightly last month, but this was largely owing to weather-related loading delays from Iraq. A Reuters survey found that Iraq’s southern exports declined to 2.05 million barrels per day from 2.39 million bpd in January, but the falls are expected to be only temporary.
Against its North Sea counterpart, Oman was trading in the $2.50 to $2.70 per barrel range under Brent, largely maintaining the spread as both benchmarks moved up in line – each recording its biggest monthly gain for more than five years.
Paul Young is the head of energy products at DME.
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