Oman crude oil trading on the Dubai Mercantile Exchange increased for the fourth consecutive month in May, rallying to fresh yearly highs as production cuts and unscheduled outages around the world combined to eradicate the oversupply in the market.
The monthly average price of the DME for last month, which is used by Oman and Dubai to set their official selling price (OSP), was US$44.33 per barrel for July delivery – up $4.93 per barrel, or 12.5 per cent, from the April monthly average of $39.40. Oman crude traded in a range of $41.12 to $46.46, with the high of the month up by more than 95 per cent from the multiyear low of $23.72 in January.
The recovery in oil prices has largely been attributed to declines in global output caused by high-cost production fields forced out of business because of the steep price declines of 2014-15, plus various unscheduled outages around the world. The latter include political instability in Nigeria and Libya, financial turmoil in Venezuela, in addition to last month’s fires in Canada, which shut a substantial amount of crude production.
Overall, about 1.6 million barrels per day of oil have been taken off the market, according to the energy consultant Facts Global Energy. FGE also noted that global oil demand growth for this year is expected to be about 1.5 million bpd, including about 400,0000 bpd of additional demand from China.
Opec’s policy since 2014 of maintaining lower prices to erase the glut from global markets is expected to make US shale production tumble by about 1 million bpd from its peak by the end of this year, although opinions among market-watchers are divided on whether or not oil at $50 per barrel will be enough to reverse the US production decline. While there are certainly shale producers that could return to the market at $50 per barrel, the uncertainty surrounding prices going forward will make any return a risky proposition.
Market focus has switched to tomorrow’s Opec meeting in Vienna, although most analysts say it is unlikely that the talks will lead to any broad-based agreement to cut production among the group’s key producers.
The problems in Nigeria, Venezuela and Libya have already trimmed overall Opec output from the recent highs, but with Iraq and Iran both stepping up on exports, reaching agreement is likely to prove a step too far – particularly with oil prices already pushing higher this year and removing any immediate pressure to address possible oversupply fears later in the year.
Less than six months after the lifting of western sanctions, Iran is close to regaining normal oil export volumes and pumping more than 3.5 million bpd, according to Reuters. Any Opec cuts would require Iran to rein in its own production and not leave it to Saudi Arabia to bear the brunt of any proposed cuts.
The mood going into the Opec meeting was summed up by the UAE oil minister Suhail Al Mazrouei, who said he was happy with the oil market, noting that prices had been correcting higher. “We are optimistic. We are seeing that the market is correcting upwards,” Mr Al Mazrouei said in Vienna.
Paul Young is the head of energy products at the Dubai Mercantile Exchange