Market analysis: oil glut lingers ahead of Opec meeting

Oman crude oil trading on the Dubai Mercantile Exchange last month remained in full bearish mode as continued concerns of a supply glut going into 2016 pushed prices to the lowest levels since early 2009, with the Opec meeting taking place amid such a backdrop this week.

The monthly average price of the DME for October, which is used by Oman and Dubai to set their official selling price, was US$42.28 per barrel (January delivery) and down $3.78 from the October monthly average of $46.03, or a fall of 8 per cent on the month. Spot prices also dipped below $40 for the first time in almost seven years, with the January contract expiring at $39.67.

The latest price tumble sets the stage for this week’s Opec meeting in Vienna, where the so-called pricing doves led by Saudi Arabia are expected to clash with hawks led by Iran and Venezuela.

Oil stockpiles have reached record levels of almost 3 billion barrels, according to the International Energy Agency, with storage terminals around the world hitting tank tops.

The Saudi position of maintaining market share in a lower-price environment has set the tone for the producer group since the summer of 2014, but with national budgets of the producer group increasingly strained by the sub-$50 per barrel oil price, the hawks are likely to call for production cuts. However, the group’s kingpin Saudi Arabia has made it clear that any cuts should be part of wider initiative including non-Opec members such as Russia, and not just fall to a handful of key GCC producers.

So far Russia has shown no appetite for reining in production, so a wide-reaching deal between Opec and non-Opec producers looks highly unlikely, which means the market is factoring in little change in production for 2016 and therefore reliant on a demand increase to restore the supply/demand equilibrium.

Opec’s meeting in November 2014 will be remembered as one of the most significant in the organisation’s history, as the decision not to rein in production sent prices into a tailspin – dropping by about $40 per barrel from the start of November and mid-January, hitting a low of $43.

In years gone by such a sharp decline in prices would typically trigger a series of extraordinary Opec meetings, but the group has resisted the temptation to convene outside the last scheduled meeting in June, where it took the decision to maintain current production. But the key difference in the summer and now is that oil prices had consolidated in the $60s per barrel range and the low-price gloom from earlier in the year had lifted.

Middle East crude prices have now sunk below the previous 2015 lows of January, so those members looking for an immediate price rebound are likely to be more vocal.

The price collapse of 2008 brought on by the global credit crunch was followed by a solid demand-led recovery in 2009, and while lower prices this time around are also spurring additional demand, the supply glut is expected to last well into 2016.

While Opec’s policy has certainly has had some success in that the US fracking boom has peaked this year, capital expenditure on upstream investment has been reined in across the globe. Demand for Opec oil is expected to grow next year, while a clash over current prices and the road to recovery are likely to polarise opinions from the opposite camps in Vienna.

As David Hufton, chief executive of the oil brokerage PVM puts it: “The meeting promises to be very lively and acrimonious,” although he noted: “it could still spring a very unlikely surprise.”

Paul Young is the head of energy products at the DME

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