If you ask a big oil company what the last five years have been like, it would probably have something to say about price collapses and the demand for destruction. If you ask a big oil importer, they would have a completely different perspective.
They could praise the price collapses that allowed them to fill up with cheap oil and they could even have a positive thing to say about the pandemic that brought prices to historic lows. And this is a problem for the largest oil cartel in the world.
OPEC and its Russian and Central Asian partners in OPEC + have been working for years to keep international oil prices higher by reducing production. The success was mixed for reasons beyond OPEC’s control. However, it can be said with certainty that the efforts of the oil producers’ club have largely borne fruit: oil prices are now at a much more comfortable level than a year ago. But buyers have been clinging to cheap oil and looking for discounts. OPEC’s problem is that I find them.
Recent news that China has reached a long-term investment agreement with Iran, in which oil was prominently present, must have raised some difficulties among Iranian OPEC colleagues. News that China is already taking much more oil from Iran is unlikely to have been a cause for joy. Iran sells its oil cheaply because there are very few buyers, while it is still under US sanctions. China is also buying because of its heavy dependence on imports for its oil consumption.
Reuters reported Earlier this month, rising Iranian oil imports into China forced other producers, including Russia, Angola and Brazil, to cut their crude oil prices to keep it competitive.
“These ‘sensitive’ barrels are clashing with supplies everywhere because they are simply too cheap,” said a Chinese trader’s report, referring to Iranian oil. Related to this: China’s oil buying frenzy may end this month
Meanwhile, Saudi Arabia has done something motivated either by despair or by 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 drive up demand.
Of course, neither China nor India were satisfied with this, 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 by importing more than 80% of the oil it consumes, immediately began diversification.
For a start, the country has suddenly reduced its orders for Saudi crude: according to sources quote According to Reuters, the country’s top four refineries had reduced their orders for Saudi oil by 36% in May, after the Kingdom announced a $ 0.40 increase 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 oil goods from Guyana – the newest member of the world club of oil producers. According to government officials, the price of oil in Guyana was competitive and the purchase was in line with plans to diversify the oil supply.
Large oil buyers have become accustomed to cheap oil and are unlikely to give up that habit in a hurry. Fortunately for them, there are plenty of offers to be surrounded, and suppliers need to sell it more than buyers need to buy it, at least until demand returns after the pandemic recedes. Things may change then, but for now, the prospects for demand remain uncertain.
About: Why Iran’s return to oil markets is not a major threat
Meanwhile, oil-dependent economies, such as those in OPEC, need oil revenues to continue and, at best, to fund their diversification efforts. The good news here is that the latest forecasts of OPEC and IEA demand are compiling. The bad news is that previous composing predictions have collapsed against the wall of reality.
AIE and OPEC expect a strong recovery in oil demand this year. According to a KPMG analyst interviewer by CNBC last week, the return would be fueled by record vaccination rates in the UK and US, government stimulus and people’s pandemic fatigue.
Unfortunately, for every tail wind, there seems to be a head wind. US vaccinations could set records, but the number of new infections is also rising, as are infections in India – an oil market that is probably more important than the US. Stimulus is good news for all kinds of spending, but it won’t be there forever. As for pandemic fatigue, this could increase demand, but with all the new rules for safe travel, the return may not be complete or take more than a few months.
In other words, no one still knows for sure how long the demand will be reduced. But when it comes to the cheap habits of big oil consumers, it doesn’t matter. With so many supplier options, buyers have the luxury to choose and choose. US shale production is also growing. Growth is guarded, to be fair, but it is there. And if it gets stronger, it could lead to a new price war and another price collapse. This will only strengthen the cheap oil habit in China and India.
By Irina Slav for Oilprice.com
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