Oman crude oil trading on the Dubai Mercantile Exchange raced to the highest levels in almost four months this week, as Opec members pledged to cut output for the first time since 2008 during the historic meeting in Algiers late last month.
Oman crude futures soared from under US$43 per barrel to above $48 in the days following the agreement, hitting the strongest level since June when this year’s high of $48.90 was recorded.
Before the surprise Opec announcement, last month’s price activity had been largely sluggish with the market range bound at $43 to $45 per barrel.
The monthly average price of the DME for last month, which is used by Oman and Dubai to set their official selling price, was $43.92 for November-loading crude, and down by $0.10 per barrel from the August monthly average of $44.02.
The Algiers agreement effectively calls an end to the Saudi-led policy over the past two years of pumping at high levels to maintain market share, plus at the same time forcing US producers to scale back on shale output.
With Opec now effectively taking back a strong degree of control on the supply side, many analysts view the move as a positive step in accelerating the rebalancing of market fundamentals which was already under way.
However, the deal comes on the back of record output from the producer group. According to the latest Reuters survey, Opec’s oil output reached about 33.6 million barrels per day last month from a revised 33.5 million bpd in August, which was the highest in Opec’s recent history.
The success of the agreement will be in the details, with analysts closely watching how much each producer will limit output by, while any sign of cracks could be taken as a negative by traders and stall any further price gains.
Already, the new Iraqi oil minister, Jabbar Al Luaibi, has threatened to abandon the deal, citing concerns with how the production figures are tabulated. “These figures do not represent our actual production,” he told reporters two days after news of the deal broke.
If by next month estimates do not change, “then we say we cannot accept this, and we will ask for alternatives”.
Iraq overtook Iran as the group’s second-largest producer several years ago but kept its Opec agenda fairly low-profile, so will play a key role in negotiations going forward.
Likewise, Iran has had strong export growth since the easing of sanctions and will be expected to curtail any future output hikes.
Opec meets again formally next month, when members will seek to ratify a binding deal.
On the demand side, as reported last week in The National, Chinese crude demand remains robust as August imports hit a four-month high of 7.76 million bpd – a huge year-on-year increase of 1.48 million bpd, or about 23 per cent.
At the same time, Chinese crude oil production has fallen by more than 400,000 bpd to 3.88 million bpd, which in percentage terms is a larger drop than the US. Although Chinese consumer demand growth has been sluggish during the past year, overall demand has been supported by the government bolstering strategic stock levels.
Demand for Oman crude oil, which underpins the DME’s flagship contract, remains strong with the second-highest delivery on record following the expiry of the November contract last Friday. Physical delivery via the DME for November loading was 26.4 million barrels – the third consecutive month that deliveries have exceeded 25 million barrels – most of which will be consumed by Chinese refiners.
Paul Young is the head of energy products at DME.
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