At-a-glance
- A sharp retreat in oil prices during the third quarter left the OPEC+ producer alliance with a difficult agenda for its October meeting. The OPEC+ group of producers settled on a headline reduction of 2 million barrels per day from November, the largest cut since the group was forced to slash quotas by 9.7 million bpd at the height of the Covid-19 pandemic in 2020.
- While the 2 million bpd was at the higher end of analyst expectations, in real terms it will be around half of the announced cut, with a majority of members of the alliance remaining within compliance even at reduced quotas as the wider group continues to miss overall targets by more 3.5 million bpd. The coalition has also agreed to extend its production co-operation agreement until the end of 2023.
- Estimates vary as to how much oil will actually be lost with some analysts saying as little as 800,000 bpd per day, although Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said the cut will likely be in the region of 1.0 to 1.1 million bpd.
- In conclusion, most of the cuts will take place in the Middle East with the group’s largest producer, Saudi Arabia, having its quota cut by over 500,000 bpd from the current 11 million bpd, while the UAE will see its quota drop by around 160,000 bpd just above 3 million bpd.
- In flat price terms, Middle East Oil priced on DME Oman futures have risen in response to the OPEC+ cuts, gaining around $6/b during the first few days of trading in October.
OPEC "Uncertainty"
The OPEC Secretariat said in a statement that the recent decision to cut production was taken "in light of the uncertainty that surrounds the global economic and oil market outlooks, and the need to enhance the long-term guidance for the oil market.” At the same time, oil markets continue to experience disruptions causes by the pandemic and subsequent economic shutdowns.
The headline 2 million bpd quota cut will take the group’s collective output ceiling of the 19 countries participating in the deal to 40.1 million bpd, the lowest since April of this year but still comfortably higher than actual production in August.
According to market surveys and tanker tacking data, 14 countries produced at below quota in August with Russia, Nigeria, and Kazakhstan registering the steepest shortfalls.
The September monthly average price for the benchmark Middle East Oman crude traded on the Dubai Mercantile Exchange retreated by over 6% versus the previous month, as global oil prices continued to fall from the 14-year highs seen over the summer amid further demand slowdown fears.
The average price for November-loading DME Oman crude was $90.80/b, down from $97.00/b for October loading barrels, or a fall of around 6.5%.
Impacts on Oman Crude and DME Oman Crude Oil Futures Contract (OQD)
Oman Blend is a medium sour crude, representing the majority of Middle East crude oil production, which typically ranges from medium to heavier grades.
Oman has been a key oil benchmark, crude grade, and reference price in the Middle East for several decades with National Oil Companies (NOCs) referencing the Oman grade in its pricing formulas since the 1980s. Since 2007, DME has hosted the DME Oman Crude Oil futures contract (OQD) which has since been adopted as a pricing reference for most Middle East NOCs to price around 5.5 million barrels of Middle East crude per day. This gives DME Oman a benchmark status alongside other major crude oil benchmarks such as Brent, Dubai and WTI giving the oil trading community a stable and efficient price risk management tool.
The grade is one the largest freely traded crude streams in the region with typical exports of over 800,000 bpd, cementing its place as a key regional and increasingly global benchmark.
Oman, which is the sole producer of the Oman Blend export grade, will chip in with around 40,000 bpd of cuts.
However, the Oman Blend is made up of oil and condensate from across the country, having returned to full production this year of around 1.05 million bpd as agreed increments under the existing OPEC+ agreement saw collective output grow at around 400,000 bpd each month.
This means that Oman Blend production will remain at around 1 million barrels per day, a significant volume that underpins the DME futures contract. By comparison, the five North Sea grades that support the North Sea Brent benchmark have a combined capacity of around 800,000 bpd, while the summer maintenance season saw output fall to as low as 600,000 bpd.
Oman, already the largest Middle East oil producer outside of OPEC, is forecast to boost its oil production to 1.135 million bpd by 2025, according to a report published by S&P Global Ratings.
In September, DME Oman futures contract traded 73,000 contracts (1,000-barrel contract) in the front month physically delivered November loading contract. A high since July 2018 as market participants increase hedging and speculative activity during the OPEC “Uncertainty”.
DME Oman pricing
Although Oman is not an OPEC member, it is part of the broader OPEC+ alliance, which has been gradually unwinding historical output cuts that were initiated in 2020.
With the Middle East absorbing the majority of the OPEC+ cuts, tighter supplies lifted the market backwardation with the key M1/M3 spread (Dec-22/Feb-23) widening to around $5/b in early October, have dipped to under $4/b in the previous month.
The prompt spread is closely monitored by National Oil Companies (NOCs) in the Middle East and is an important indicator for setting Official Selling Prices (OSPs).
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
