If you ask a big oil company what the last five years have been like, they would probably have something to say about falling prices and the demand for destruction. If you ask a big crude importer, they would have a completely different perspective.
They may well praise the price drops that have allowed them to fill up with cheap crude, and they may even have something positive to say about the pandemic that brought prices to historic lows. And that’s a problem for the world’s largest oil-producing cartel.
OPEC, and its Russian and Asian Central OPEC + partners, have been working for years to keep international oil prices higher by slowing production. Success has been mixed for reasons beyond OPEC’s control. Still, it can certainly be said that the efforts of the oil producers ’club have paid off for the most part: oil prices are now at a much more comfortable level than they were a year ago. But buyers have been hooked on cheap oil and are looking for discounts. The problem with OPEC is that they are finding them.
The recent news that China had signed a long-term investment agreement with Iran, in which oil stood out, must have caused some problems among Iran’s OPEC colleagues. Nor is it likely that the news that China will take much more oil from Iran will be cause for joy. Iran sells its oil at a good price because there are very few buyers while it is still under US sanctions. And China buys because of its heavy dependence on imports for oil consumption.
Reuters reported earlier this month, growing Iranian oil imports to China had forced other producers, including Russia, Angola and Brazil, to reduce crude oil prices to keep them competitive.
“These‘ sensitive ’barrels are busting supplies everywhere because they are simply too cheap,” the report quoted a Chinese trader in reference to Iranian oil as saying. Related: China’s oil buying frenzy may end this month
Meanwhile, Saudi Arabia did something motivated by despair or overconfidence. The Kingdom, which is OPEC’s largest oil producer and extremely vulnerable to falling prices, said it would raise oil prices for Asian buyers: the world’s largest oil market and boost growth in oil prices. demand.
Naturally, neither China nor India were happy about it, but unlike in the past, when there were no alternatives to OPEC oil, there are now alternatives. India, which has been a vocal opponent of OPEC + ’s efforts to raise prices as it imports more than 80 per cent of the oil it consumes, immediately began to diversify.
For starters, the country has drastically reduced its Saudi crude orders: according to sources quoted for Reuters, the country’s top four refiners had cut their May orders for Saudi oil by 36%, after the UK announced a $ 0.40 hike in official selling prices for Asian buyers.
But India is also looking for non-OPEC suppliers. Indian media recently reported that Indian Oil Corporation will buy a load of oil in Guyana, the newest member of the world club of oil producers. According to government officials, the price of Guyanese oil was competitive and the purchase was in line with plans to diversify the oil supply.
Big oil buyers have become accustomed to cheap oil and are unlikely to give up this habit in a hurry. Fortunately for them, there is plenty of supply to do so, and suppliers have to sell it more than buyers need, at least until demand bounces back after the pandemic pulls out. Things may change then, but for now, the demand outlook remains uncertain.
Related: Why Iran’s return to oil markets is not a major threat
Meanwhile, oil-dependent economies, such as those in OPEC, need oil-derived revenues to continue and, at best, fund their diversification efforts. The good news here is that the latest forecasts of OPEC and IEA demand are bullish. The bad news is that previous bullish forecasts have crashed against the wall of reality.
The IEA and OPEC expect a sharp rise in oil demand this year. According to a KPMG analyst interviewed by CNBC last week, the rebound would be fueled by record vaccination rates in the UK and US, government stimulus and pandemic fatigue from people.
Unfortunately, for all tail winds, there seems to be a head wind. Vaccinations in the U.S. may be setting records, but new infections are also on the rise, and so are infections in India, an oil market arguably more important than the U.S.. The stimulus is good news for all sorts of expenses, but it won’t be there forever. As for pandemic fatigue, this could increase demand, but with all the new rules on safe travel, the rebound may not be complete or it may take more than a couple of months.
In other words, no one still knows for sure how long demand will remain moderate. But when it comes to the cheap oil habit of big oil consumers, it really doesn’t matter. With so many supplier options, buyers have the luxury of picking and choosing. American shale production, by the way, is also growing. Growth is protected, to be fair, but it is there. And if it is reinforced, that could direct to a new price war and another price collapse. This would only harden the cheap oil habit of China and India.
By Irina Slav for Oilprice.com
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