Oman crude oil trading on the Dubai Mercantile Exchange during May maintained its tight range since the start of the year, but edged higher during the first half of the month to consolidate above US$106 a barrel.
Once again, the deteriorating situations in Ukraine and Libya were cited as the key support factors for firm prices.
The DME July-delivery contract settled at $106.46 per barrel, up $1.58 from the closing April price of $104.88, when the June contract settled. The monthly average of the DME, which is used by Oman and Dubai to set their official selling price, was 105.65 a barrel, slightly up from $104.98 in April.
The ongoing political crisis in Ukraine has so far not affected the energy sector in the region, although escalating tensions are prompting fears of further deterioration in regional geopolitics, and a possible threat to Russian oil and gas supplies.
Oil production in Libya, on the other hand, has collapsed to 160,000 barrels per day (bpd), far below its production capacity of 1.4 million bpd, and despite proclamations by the government that a settlement can be reached with the rebels, market watchers are increasingly discounting the likelihood of any resolution in the near term.
However, prices have largely flatlined on the three main oil benchmarks – namely Brent, West Texas Intermediate and Oman – as any threat to supplies is comfortably offset by growing US production and the ability of Opec members such as Saudi Arabia to easily step up crude oil exports and cover any potential shortfalls.
According to the latest Reuters survey, Opec's oil output rose to a three-month high in May as increased supplies from Angola and a further gain in exports from southern Iraq outweighed worsening unrest in Libya. Supply from Opec averaged 30.02 million bpd, up from 29.68 million bpd in April, based on shipping data and information from sources at oil companies, Opec and consultants.
The lack of price movement was underlined by the Oman price during the second half of May, with the daily settlement locked in narrow range of $106.01-$106.95 a barrel.
A recent report from the French bank BNP Paribas, one of the world’s largest banks in commodities trade finance, noted that oil price volatility is the lowest in a decade and the trend towards price stability has picked up pace since last year.
“When we look at implied volatility since 2010, the market appears to have witnessed a distinct step-shift lower since roughly the second half of 2013. In the prior period, 30 per cent volatility was more the norm. This year, implied volatility has trended sub-20 per cent, with current front-month WTI trading at circa 14.5 per cent,” said the BNP Paribas report.
The collapse in price volatility has generally had a detrimental effect on traded volumes on oil exchanges, as stable and predictable prices mean there is less need for price hedging among oil producers and consumers.
For instance, the world’s two largest oil futures contracts, WTI and Brent, have experienced sharp year-on-year declines for traded volumes. Nymex’s light sweet crude oil future (WTI) was down 14 per cent in April compared to year-ago volumes, while Brent crude future tumbled 28 per cent year-on-year.
But the Dubai-hosted DME has bucked the trend of its western counterparts, registering a strong growth trend as oil trading increasingly switches focus to Asia and the Middle East. The DME’s Oman contract recorded a volume increase of 57 per cent year-on-year.
Vicky Sanders, the head of analytics sales at the major commodities broker Marex Sprectron, also attributed the lower derivatives volumes on the larger exchanges to the low price volatility levels, particularly in the oil markets.
“Since March, WTI has been trapped in less than a $5 range; Brent has been even less captivating,” said Ms Sanders. “The price on December 31 was $110.80, today it opened at $109.81. As a result volatility has collapsed, and Brent implied volatility reached a five-year low of 12.09 per cent earlier this month.”
To put that into perspective, the implied volatility for Brent oil reached was as high as 51 per cent as recently as 2012.
Paul Young is the head of energy products at DME
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