Oman crude prices drop as Brent tumbles 17% last week

Muscat: The Oman Crude prices drop slightly on Monday in line with global trends.

It dropped by 33 cents to $94.25 compared to $94.58 on Friday.

Middle East oil ⁠producers are slashing prices to attract buyers as a sharp recovery in flows through the Strait of Hormuz tips the global crude market toward oversupply - a preview of the crowded, hyper-competitive oil market that the Iran war may ​leave in its wake.

Global benchmark Brent crude tumbled more than 17% last week ​to around $97 a barrel, its steepest weekly decline since the 2020 pandemic. The slump followed the electoral rout of US President Donald Trump's Republican Party in the US midterm elections, which raised expectations that Washington could swiftly de-escalate the war that has upended energy markets since February 28.

Regardless of whether Washington and Tehran secure a durable peace deal in the coming weeks, the market faces the prospect of a crude oil glut - a surprising outcome at the end of a year that has featured one of the biggest energy supply shocks in modern history.

Yet even though crude is flowing out of the Gulf, the global oil market is far from its pre-war normal. Demand remains constrained by elevated prices and limited refining capacity, while global inventories are depleted.

RAPID RECOVERY

Oil exports through Hormuz have recovered sharply since September, as ⁠Gulf producers can now navigate the narrow waterway using tanker convoys protected by the US Navy.

Crude exports through the strait averaged 10.3 million barrels per day in October, up from virtually zero in ⁠the first month of the war, excluding Iranian shipments. That compares with a pre-war average of 13.5 million bpd, according to Kpler data.

The recovery looks even more striking when alternative export routes through Saudi Arabia's Red Sea port of Yanbu and the United Arab Emirates' Fujairah terminal are included. Total regional crude exports reached 16.6 million bpd in October, just shy of the pre-war average of 17 million bpd, Kpler data showed.

At the same time, producers outside the Middle East have responded to the wartime supply shock by increasing ‌output, particularly in the US, Brazil and Canada.

Global crude production reached 85 million bpd in October. That's not only the ​highest since the start of the war, but ⁠also above the five-year average of 83 million bpd, according to consultancy Energy Aspects.

By almost any measure, the world is set to be awash in crude.

GLOBAL COMPETITION

Price signals certainly point ​to oversupply.

Saudi Arabia cut the December price of its flagship Arab Light ‌crude for Asian customers by $2 a barrel from November, pushing the discount against the Oman/Dubai average to $6.50 a barrel, the lowest since the pandemic in May 2020.

Spot premiums for Middle Eastern crude benchmarks have also collapsed. Oman's premium to the Dubai benchmark dropped from $34 a barrel in mid-September to just 95 cents last Tuesday, its weakest since ​July, before recovering slightly to $1.76 on Thursday, Reuters data showed.

The sharp discounts have several drivers, including compensation for elevated freight costs. Iranian attacks on vessels transiting Hormuz continue on a near-daily basis, despite US escorts, forcing many producers to resort to expensive ship-to-ship transfers in the Gulf of Oman. This has sent tanker freight rates soaring, with shipping costs now averaging around $30 a barrel, compared with roughly $5 before the war.

But the steep discounts Gulf producers are offering also reflect growing competition to attract a limited number of buyers.

Global refining capacity has declined significantly this year due to damage in the Middle East and Ukrainian strikes on Russian energy infrastructure. This, in turn, has reduced refiners' ability to turn much of the recovering crude supply into gasoline, ‌diesel and other fuels.