Market analysis: Glut fears quash oil rally

The oil price rally at the start of last month proved short-lived when initial bullish sentiment on declining US oil production gave way to concerns on overall global production and softening economies.

Even so, prices of Oman crude on the Dubai Mercantile Exchange closed the month marginally higher. The monthly average price of the DME for October, which is used by Oman and Dubai to set their official selling price, was US$46.03 per barrel for December delivery, up $0.27 from the October monthly average of $45.76. The new front-month January 2016 crude was trading on Monday at about $47 per barrel.

Prices rebounded by more than 10 per cent in the early part of October to above $50 for the first time since early August, but the rally proved unsustainable as fears of a continued overhang turned sentiment to the downside.


This was underlined by a mid-October report from the International Energy Agency which said higher oil output from Opec, coupled with a slowdown in world economic growth, would mean that the crude oil glut will persist through 2016.

While the IEA pointed out that oil demand has been relatively robust this year thanks to lower prices, the forecaster said it expected a “marked slowdown” in oil demand growth as the stimulus from lower prices faded and weakening economic activity in countries dependent on commodity revenues.

Oil prices are expected to remain rangebound in the short term as the focus switches towards the next Opec gathering in Vienna on December 4. Arabian Gulf producers look set to stick with the policy of maintaining market share regardless of price – unless other major producers support a reduction and not leave it to key producers such as Saudi Arabia and the UAE to bear the brunt of any proposed cuts.

Late last month The Wall Street Journal reported that Saudi Arabia, the UAE, Qatar and Kuwait have so far rejected proposals by Venezuela for Opec members to hold an oil price summit with non-Opec producers, aiming to strike a deal to cut global production – which the IEA recently put at 96.6 million barrels per day, compared to demand of 94.5 million bpd.

Opec members are said to be fearful that production cuts from non-members will not be on the table, or there will be little enforcement if a deal is struck. “It will be like going back to square one,” the newspaper quoted an Opec official from a Gulf country as saying. “It will have a negative impact on the market and prices if no real measures are taken.”

Supporters of the current Opec strategy of maintaining market share and forcing out marginal producers to avoid a glut of oil in future point to recent figures as evidence the policy is proving successful.

US production hit a multi-decade peak of 9.6 million bpd in April of this year, but a sharp decline in activity as “frackers” are forced to scale back production of expensive shale oil has resulted in output tumbling by about 500,000 bpd, and by next summer, the US Energy Information Administration expects production levels to be down by about 10 per cent from the peak.

The keenly watched Baker Hughes US rig count, which acts as a measure of future US production, show that US oil drillers removed 16 rigs in the week ended October 30, bringing the total oil rig count down to 578 – the lowest number since June 2010.

Paul Young is the head of energy products at the DME.

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