Middle East Oil Market Weakens As Glut Concerns Gain Traction

The Middle Eastern oil market has weakened in recent weeks on concern that regional supplies will outstrip demand, adding to signs of a softening global picture that's weighed on benchmark crude futures.

Among widely watched metrics, the premium of Abu Dhabi's flagship Murban over Brent has declined to the narrowest since early October. The shift signals concern too much crude is being offered in the Middle East than can readily be bought by refiners in Asia at a time of higher, competing worldwide output.

Global benchmark Brent is on pace for a third year of declines, as expectations that worldwide supplies will exceed consumption outweigh geopolitical concerns. Members of OPEC, including Mideast shippers such as Saudi Arabia, have added barrels just as rival drillers in the Americas also bolster output.

Reflecting the abundant availability of near-term supplies, state producer Saudi Aramco recently cut the price of its flagship crude grade for Asia to the lowest level in five years. In addition, the Paris-based International Energy Agency forecasts that there will be a record global crude glut next year.

"The surplus in the oil market is set to grow in 2026, following OPEC+'s decision to unwind supply cuts at a quicker-than-expected pace," said Warren Patterson, head of commodities strategy at ING Groep NV. "Non-OPEC supply is also expected to grow at a healthy clip despite this year's price weakness."

Other markers in the Middle East are also flashing weakness. Among them, the Dubai benchmark's discount to Brent, known as the Brent-Dubai EFS, was recently at its widest in about seven weeks.

Within the region, differentials between some spot crudes and the Dubai benchmark have softened, according to General Index. Upper Zakum and Oman had a 50- to 60-cent premium to Dubai at the end of last week, down from about 90 cents at the start of the month.

On a global basis, ING forecasts supply will rise 2.1 million barrels a day next year, while demand expands about 800,000 barrels. The IEA, meanwhile, projects output will exceed consumption by 3.8 million barrels a day in 2026.

"The scale of the surplus and the expected build in inventory should put the forward curve under additional pressure," said Patterson, referring to the pricing of crude over the coming months.

Source: Bloomberg Europe