Oil oversupply fears are back to weigh on crude prices
Monthly Oman crude oil trading on the Dubai Mercantile Exchange (DME) fell for the first time in six months as weaker sentiment returned on renewed oversupply fears, briefly knocking Oman crude prices under US$40 a barrel for the first time since April.
The monthly average price of the DME for July, which is used by Oman and Dubai to set their official selling price, was $43.40 a barrel for September-loading crude, and down $3.20 a barrel or 7 per cent from the June monthly average of $46.60.
Oman crude traded in a range of $39.83 to $46.56 over the month and closed on the final day of July at the monthly low.
Increases in global production have been led by Opec, with last month’s output said to be at the highest in recent history, as Iraq and Nigeria pump more crude despite ongoing militant attacks on oil installations. Reuters reported that supply from Opec has risen to 33.4 million barrels per day last month.
The leading Opec exporter Saudi Arabia has kept output close to a record high, Reuters found, as it meets seasonally higher domestic demand and focuses on maintaining market share rather than trimming supply to boost prices. Opec’s production could also increase further should talks to reopen some of Libya’s oil facilities succeed, said Reuters.
Adding to the weaker market outlook global stocks remain high, particularly in the US. The oil brokerage PVM noted that oil inventories in the US have now reached 70.4 days at the end of June, up from 68.1 days at the start of the year. This puts US summer stockpiles at a 20-year high, which concerns analysts as demand usually peaks in the summer because of the long distances covered by US motorists. More worrying for market bulls are US petrol stocks, at 241.5 million barrels, or 12 per cent higher than this time a year ago, according to the US Energy Information Administration.
Strong global demand for petrol (in part encourage by the lower pump prices of the past two years) had encouraged refiners to maximise petrol production, which has caused a supply glut across the globe. Petrol in Asia averaged $12 a barrel over Brent crude last year, but in July the premium dropped to less than $2, impacting refiners’ profits. This in turn cuts demand for crude oil, hence the price downturn over the summer.
Market watchers say that about 1 million bpd of processing capacity in Asia will be shut in October, the biggest shutdown this year as refiners try to cope with weak refining margins and high fuel inventories.
The softer market has also lead to weaker differentials for regional crude grades. For instance, Saudi Arabia has slashed the September price for its Arab Light crude oil for Asian customers by $1.30 a barrel, the largest cut for the Kingdom’s main export grade in nearly a year.
Qatar’s Al Shaheen, which although is only a small volume typically sets the price of Dubai, is also an important regional benchmark. Al Shaheen for September loading was trading last month at more than a $1 a barrel discount, while Abu Dhabi’s Upper Zakum crude for September loading traded as low as around 80 cents a barrel discount (against Dubai).
However, the Oman benchmark has closed the gap on other benchmark crudes, with oil prices in the West falling faster than those in the Middle East. The US WTI crude benchmark recently stood at around $1.40 a barrel over Oman compared to about $3 a month ago, while the European Brent against Oman was trading at about $2.50 a barrel compared to $4 early last month.