Oil glut in Middle East as crude sales falter

The Gulf region, which supplies 40 per cent of the world's oil, is glutted with crude that producers cannot immediately sell, even as US and European oil has risen above US$82 a barrel. The amount of oil in long-term floating storage in the Gulf and Red Sea is estimated at 30 million barrels, or enough to supply all of North, South and Central America for a day.

The trouble is that most Middle East crude is not sold in the Americas. Instead, it is shipped to the growing economies of Asia and, to a lesser extent, markets in Europe. While Europe is not oversupplied with crude because of a seasonal drop in North Sea oil output from maintenance and repairs at production plants, Asia has as much as it can use. Increasing Russian supply to Asia is also a factor in slower Middle East sales there.

"The Asian market has had to deal with a supply overhang," the Vienna-based consultancy JBC Energy said yesterday in a research note. "It's likely we will see [price] cuts across the board in Asia." Abu Dhabi National Oil Company (ADNOC) has retroactively dropped its official selling price for crude loaded last month. It is now asking $73 a barrel for its flagship Murban crude after a price cut of $1.80 a barrel.

Murban usually trades at a premium to the regional benchmark Dubai crude but the gap between the two is now at its narrowest since at least 2002, JBC noted. So other regional oil exporters, including Saudi Aramco, may soon follow ADNOC's lead. Meanwhile, Abu Dhabi's Murban crude is now nearly $10 a barrel cheaper than the benchmark US and European crudes - an exceptionally wide price gap considering many Middle East crudes were recently trading at a premium to the widely quoted West Texas Intermediate and North Sea Brent crude oils.

Yesterday, the US and European crudes were both trading at close to $82.50 a barrel. While refinery maintenance in Far East markets has contributed to the oversupply in recent months, oil shipments to Asian markets through Russia's East Siberia Pacific Ocean (ESPO) oil pipeline are causing a longer-lasting headache for Gulf producers. The ESPO blend of crude shipped through the pipeline from recently developed oilfields in eastern Siberia is now "a popular alternative" to Middle East crude, JBC reported.

The head-on competition between Russian crudes, which also flow to Europe, and those from the Middle East is likely to continue for at least some months. At the moment, the prices of futures contracts for crude bought from Middle East and European suppliers for November delivery are almost the same, so there is little opportunity for traders to make a profit from the difference. The longer Middle East crude remains in storage, the more downward pressure it will put on international oil prices as it is released to the market.

The US government yesterday reported stockpiles of petrol in the US had increased by 729,000 barrels in the preceding week, suggesting weak demand from US motorists in the crucial summer driving season. And high unemployment in Europe and early signs that the powerhouse economies of Asia and India may be faltering raise worries about global economic recovery. Yesterday, international crude prices continued to show strength despite weaker US housing data and falling prices for many US equities. Crude's resilience was attributed to US dollar weakness.

But Abu Dhabi's price cuts could be a sign of things to come. [e-mail]