Story Merrin James and Gautam Viswanathan
Oman’s oil resources have, over the years, fuelled remarkable economic development in the Sultanate, under the astute leadership of the late His Majesty Sultan Qaboos bin Said bin Taimour.
Recent changes in the global oil markets, however, have tremendously affected the demand and supply of black gold. During the last decade, Oman’s oil prices witnessed a series of crests and troughs, with price fluctuations ranging from an all-time low of $23 to a record-high of $147.
According to the Dubai Mercantile Exchange (DME), the body responsible for selling Oman’s oil on the global market, the price of Oman crude averaged $77.70 per barrel from 2010-19, compared to the average selling price of $46.94 per barrel in the 2000s and the 1990s average of $17.12 per barrel.
Since the inception of DME Oman futures contract in June 2007, the highest settlement price of $141.27 per barrel was recorded on July 4, 2008. This was due to a rapidly shrinking global demand for energy, with oil prices falling from the July 2008 high of $147 to a December 2008 low of $32.
The Oman crude futures contract is followed by four national oil companies: that of Oman, Saudi Arabia, Bahrain, and the Emirate of Dubai. Starting February 2020, Kuwait will also join this pricing mechanism. Raid Al-Salami, DME Managing Director, said in this context: “The combination of Oman’s historical role as a trusted benchmark with best-in-class technology, market regulation and physical delivery makes DME Oman a very compelling benchmark for national oil companies that want transparent price discovery for their crude oil exports.”
The lowest price of the last decade at $23.72 per barrel, was recorded on January 21, 2016, amid the global oversupply of crude. In order to curtail supplies and prevent inventory build-up, the Organisation of Petroleum Exporting Countries (OPEC) signed the production accord with Russia and nine other non-OPEC countries including Oman in December 2018, which commits the 24-country coalition (also known as OPEC+) to cutting oil production of up to 1.2 million barrels per day through March 2020. This implies a reduction in supply of half a million barrels per day from current levels.
In 2019, on the DME, Oman crude averaged $63.96 per barrel, down from $69.94 per barrel the previous year. The December average of $65.49 per barrel was the highest since May’s $69.80 per barrel. Year-on-year, the final DME marker price for the year ($67.42 per barrel) represented a 26 percent increase on the corresponding year-end 2018 marker price of $53.38/b.
The reason for such frequent fluctuations in the market, according to Ramanuj Venkatesh, a financial analyst in Oman, with experience in the oil and gas sector, is due to three main criteria.
“One, would be the oil futures contracts that are being executed, the second would be market sentiment, and the third is supply and demand of oil,” he explained to T Magazine. “The main focus area would be the Oman’s oil future contracts which will cement its place the world’s key production region. Given the current scenario, with the US investing heavily in shale gas production, this has affected the prices of oil in the Middle East. Prices previously hovered around $113 a barrel in 2011, but has fallen to around $60 a barrel at present,” he added.
The Government of Oman has designed the Vision 2040 economic diversification programme that outlines strategies to make the country less reliant on oil and gas for revenue. It states that 93 per cent of economic activity should be fuelled by non-oil sectors.
A senior official at an oil and gas company in the Sultanate remarked that despite the shift of focus to clean energy across the world, oil and gas will continue to play a major role in industrial development. “While efforts are being made to harness renewable energy across the Middle East, the industrial sector, which involves heavy and light industry and manufacturing would still rely primarily on fossil fuels. Industries such as agriculture, fishing, mining, construction, long-haul transportation, all use fossil fuels, and I think will continue to do so for the foreseeable future, until a viable alternative is found,” he said.
“Research and experimentation is being carried out to find sustainable substitutes for Aviation fuel which is of a higher quality than the other standard fuels, but it will take a very long time. Simply put, the demand for oil and gas is extremely high right now, and that is what is determining the prices of these commodities at present,” he said.
According to Ramanuj, higher oil prices would provide Oman with more funding to carry on with The National Programme for Enhancing Economic Development (Tanfeedh) — the Sultanate’s signature initiative for sustaining economic growth. This programme looks to move from heavy dependence on oil and gas revenue and towards five areas of expansion – manufacturing, agriculture and fisheries, mining and energy, tourism, and transport and logistics. “An increase in oil prices results in higher foreign exchange rates for oil-exporting countries like Oman. Therefore, a rise in oil price will benefit the economy by increasing investor confidence and jobs, thereof,” he added.