Rising prices are starting to threaten oil demand in Asia, especially in a country like India, which is starting to feel the pressure more than others, says Paul Hickin
Puneet Wadhwa | New Delhi Last Updated at July 10, 2018 13:46 IST
Rising prices are starting to threaten oil demand in Asia, especially in a country like India, which is starting to feel the pressure more than others. India could feel the pinch with both Venezuelan and Iranian crude, which is also of the heavier sourer variety, coming off the market, says London – based PAUL HICKIN, associate director at S&P Global Platts in an interview with Puneet Wadhwa. Edited excerpts:
Can you indicate a broad range where you see oil prices at by December 2018-end?
S&P Global Platts Analytics has forecast a $75 – $80 a barrel range for the next 18 months, but that doesn’t tell the broader risks to this story. Oil supply outages are casting a lugubrious shadow over Iran, Venezuela and Libya in particular. Venezuela’s already steep decline shows no sign of ending, with the OPEC survey from S&P Global Platts putting production down at 1.30 million barrels per day (b/d) for June, the lowest in the history of the survey, except for a strike in late 2002 and early 2003 that crippled the industry.
Looming US sanctions on Iran, set to start on November 5 – which is producing around 3.80 million b/d according to Platts — could ultimately wipe off the 1 million b/d the country added after sanctions were lifted in early 2016. And Libya has seen output plunge after a political dispute between two rival National Oil Corporations led to key oil ports blockaded and industry sources see a swift resolution to the deadlock as unlikely. Supply risks are certainly haunting the global oil market and it will be whether OPEC, Russia and the US can provide enough supply going forward to ward off those fears.
How is the oil market viewing global trade war fears now?
US tariffs and China’s retaliatory response has emerged as a big risk for commodity demand and prices in 2018, alongside a slowdown in the Chinese economy and geopolitical uncertainty. While on one level the initial impact of the tariffs look to be easily swallowed by the US and China economies, analysts have cautioned about the ripple effect on to the supply chain that would ultimately hurt global demand and investment.
Specifically on oil, China’s strong demand for oil has seen it absorb much of the incremental growth in US exports of LPG and crude. China still accounted for less than a fifth of the total value of US crude exported last year. China’s share of the total rose to over 20% in the first quarter of this year. US crude oil, however, accounts for only 3% of the volume imported and 7% of the value. Little, if any, US crude is bought via long-term contracts and Chinese buyers will have hardly any difficulty in substituting it with crude from other countries.
It is most likely that the impact on US crude and other energy commodities will change trade flows. US crude, for example, could be sold to Europe, and LPG to other Asian consumers. This would allow Europe and the Middle East to increase their exports of crude and LPG to China. In order for this to happen, US exporters will need to price their cargoes competitively.
What’s your interpretation of the recent moves by OPEC?
OPEC’s alliance with Russia and other energy producers gives it control of almost 50% of the global oil supply and has reasserted its influence. It acted to rebalance the market much more quickly than expected by removing more than 1.8 million b/d since the start of 2017 as part of its production cut deal. It has now agreed that it will act again to bring back 1 million b/d back into the market to fend off the risk of output shortages. The question now is what spare capacity – extra crude it can bring on at short notice and be sustained – is available. Platts Analytics estimates that Saudi Arabia has around 1 million b/d it can add before testing its own stress levels and Russia has between 200,000 b/d and 300,000 b/d, while UAE, Kuwait and Iraq can add some barrels too. Whether this will be sufficient given healthy demand and risks to supply will be on the market’s radar for the foreseeable future.
Venezuela’s oil production has dipped to a 30-year low. What are the implications for India?
The loss of heavier sourer barrels of crude that Venezuela produces will be in part plugged by extra heavier sourer crude from Saudi Arabia, Russia and Iraq, but the changing crude mix is a big headache for refiners.
India could feel the pinch with both Venezuelan and Iranian crude, which is also of the heavier sourer variety, coming off the market. However, the oil ministry has stayed upbeat, stating that it expects a cordial and business friendly atmosphere in the Latin American producer. India – the world’s third largest importer of crude – has also been unconcerned about the tightening of supplies in the oil market, instead warning that the current oil price rise was pinching India’s economy.
How seriously should one take the US threat to impose sanctions on oil imports from Iran?
India’s refiners will need to be ready for the worst case scenario, meaning a drastic reduction of imports of Iranian oil from November when sanctions kick in. India is the second biggest buyer of Iranian crude — with imports averaging 600,000-700,000 b/d in the past 12 months – after China and will probably reluctantly start to comply with the sanctions.
The risk is that OPEC member Iran loses market share to fellow members Saudi Arabia and Iraq creating further schisms in the pact. The alliance had shown remarkable unity to comply with the production cut deal but the new agreement made in June to raise output lacks clarity as to whether OPEC members can compensate for others that aren’t able to put some of the barrels back into the market.
How are the oil markets viewing the macro-economic data from major consumers like China, US and Europe?
While there are risks to the macro-economic picture, most notably in the biggest oil producer China, the global demand trend for oil remains relatively strong. Higher oil prices could start to crimp demand for crude if they remain elevated, dragging on global gross domestic product (GDP) growth, with signs of concerns in places like Turkey and Brazil for instance, which could have a far greater impact on overall demand growth, according to Platts Analytics.
First Published: Tue, July 10 2018. 13:46 IST
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