Middle East Oil Prices Signal Surplus Fears

(MENAFN- The Arabian Post) Arabian Post Staff -Dubai

Middle Eastern crude markets are showing growing signs of strain as supply from the region appears set to exceed demand, reinforcing a broader softening trend in global oil fundamentals that has pressured benchmark futures and physical differentials.

One of the clearest indicators has been the steady erosion in the premium of Abu Dhabi's Murban crude over Brent. That spread, closely tracked by traders and refiners, has narrowed to its weakest level since early October, a move widely interpreted as a signal that refiners are pushing back against the volume of crude being offered from the Gulf. Murban, which underpins the ICE Futures Abu Dhabi exchange, is a key benchmark for Asia-bound cargoes and is often seen as a barometer of regional supply-demand balance.

The decline in Murban's relative value reflects unease among buyers that Middle Eastern producers are supplying more oil than refiners can comfortably absorb. Asian refiners, the primary customers for Gulf grades, are contending with rising availability of crude not only from the Middle East but also from the Atlantic Basin, where output from the United States, Brazil and Guyana has expanded. This has increased competition for market share and weakened sellers' pricing power.

Producers in the Gulf have continued to pump at robust levels despite a backdrop of fragile demand growth. Several major exporters have been producing near the upper end of their capacity targets, while new upstream projects have added incremental barrels. Abu Dhabi National Oil Company has pressed ahead with plans to lift capacity beyond 5 million barrels a day by the end of the decade, while Saudi Aramco maintains substantial spare capacity even as it adjusts output in line with broader OPEC+ policy.

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That policy itself has become a source of uncertainty. OPEC and its allies have maintained supply curbs on paper, yet compliance has varied and some members have gradually unwound voluntary reductions. Markets have responded by focusing less on headline quotas and more on actual flows, shipping data and refinery intake. The softer Murban-Brent spread suggests traders see little immediate tightness in regional supply, despite geopolitical risks that have periodically flared across the Middle East.

On the demand side, Asian refiners are operating in a challenging environment. Refining margins have come under pressure as fuel demand growth shows signs of slowing in several major consuming economies. China's oil demand, a critical driver for Middle Eastern exports, has grown more unevenly than expected as economic recovery remains patchy and structural shifts reduce growth in diesel consumption. In South and Southeast Asia, demand continues to expand but not at a pace sufficient to offset the surge in available crude.

Higher global output has compounded the pressure. The United States remains the world's largest oil producer, with shale output proving resilient despite higher costs and capital discipline. Brazil and Guyana are adding new offshore capacity, sending more medium and light sweet crudes into international markets that directly compete with grades from the Gulf. The result has been a buyers' market, particularly for refiners with flexible crude slates.

Benchmark futures have mirrored these physical market signals. Brent prices have struggled to sustain rallies, with gains often capped by concerns over oversupply and swelling inventories. Time spreads in the futures market have flattened, another indication that traders see less urgency to secure barrels for prompt delivery. Analysts note that when both physical differentials and futures structures weaken simultaneously, it often points to a systemic imbalance rather than a temporary dislocation.

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Middle Eastern producers face a delicate balancing act. Maintaining output supports revenue and preserves long-term customer relationships, but sustained oversupply risks eroding prices further. Some exporters have already adjusted official selling prices to Asia, trimming premiums to remain competitive. Such moves can help clear barrels in the short term but also underscore the lack of pricing power in the current environment.

The narrowing Murban premium carries broader implications beyond Abu Dhabi. As a benchmark increasingly used in term contracts and spot trading, Murban's performance influences pricing across the region. A prolonged period of weakness could feed into contract negotiations and shape refinery procurement strategies well into the next quarter.

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