If you ask an oil magician how the past five years have been, they would probably have had something to say about price falls and destruction claims. If you ask a big importer of ru, they will have a very different perspective.
They can appreciate price price accidents that have enabled them to replenish cheap crude oil, and they even have one positive thing to say about the pandemic that has brought prices to historic lows. And that’s a problem for the world’s largest oil-producing cartel.
OPEC, and its Russian and Central Asian partners in OPEC +, have been working for years to keep international oil prices higher by limiting production. Success has been mixed for reasons beyond OPEC’s control. It can certainly be said that the oil producers’ club’s efforts have mostly borne fruit: oil prices are now at a much more comfortable level than a year ago. But buyers have gotten cheap oil and are looking for discounts. OPEC’s problem is that they find it.
The recent news that China has tainted a long-term investment agreement with Iran, in which oil appears prominently, must have caused some stalemate among Iran’s fellow OPEC members. The news that China is already consuming much more oil from Iran will probably not have been a cause for joy either. Iran sells its oil cheaply because there are very few buyers while it is still under US sanctions. And China buys because of its huge dependence on imports for its oil consumption.
Reuters report earlier this month, rising Iranian oil imports into China forced other producers, including Russia, Angola and Brazil, to lower their crude oil prices to keep them competitive.
“These ‘sensitive’ barrels are knocking down supplies from everywhere because they are simply too cheap,” the Chinese trader said, referring to Iranian oil. Related: China’s oil buying frenzy could end this month
Saudi Arabia, meanwhile, has done something motivated by desperation or too much self-confidence. The Kingdom, which is OPEC’s largest oil producer and extremely vulnerable to price accidents, said it would raise oil prices for Asian buyers: the world’s largest oil market and the growth in demand.
Of course, 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 staunch opponent of OPEC +’s efforts to raise prices since importing more than 80 percent of the oil it consumes, immediately began to diversify.
To begin with, the country has sharply reduced its orders for Saudi crude oil: according to sources quoted by Reuters, the country’s four best refineries reduced their orders for Saudi oil by 36 percent in May, after the Kingdom announced a $ 0.40 rise in official selling prices for Asian buyers.
But India is also looking for non-OPEC suppliers. Indian media recently report that Indian Oil Corporation will buy an oil freight from Guyana – the newest member of the global oil producers’ club. According to government officials, the price of Guyanese oil was competitive and the purchase was in line with the diversification plans for oil supply.
Large oil buyers have become accustomed to cheap oil, and they are unlikely to give up this habit in a hurry. Fortunately, there is enough supply to go, and the suppliers have to sell it more than the buyers need to buy it, at least until demand bounces back after the pandemic subsides. Things can then change, but for now the outlook for demand remains uncertain.
Related: Why Iran’s return to oil markets is not a major threat
Meanwhile, oil-dependent economies such as OPEC need oil revenues to continue and, at best, finance their diversification efforts. The good news here is that the latest OPEC and IEA demand forecasts are bullish. The bad news is that earlier bullish predictions have crashed against the wall of reality.
The IEA and OPEC expect a strong recovery in oil demand this year. According to a KPMG analyst interrogate last week by CNBC, the rebound would be fueled by record vaccination rates in the UK and US, government stimuli and people’s pandemic fatigue.
Unfortunately, there seems to be wind for every wind. Vaccinations in the US may set records, but new infection rates are also rising, and so are infections in India – an oil market is probably more important than the US. Stimulus is good news for all kinds of spending, but it will not be there forever. In terms of pandemic fatigue, this may increase demand, but with all the new rules around safe travel, the rebound may not be complete or may take longer than a few months.
In other words, no one still knows for sure how long the question will remain muted. But when it comes to the cheap oil consumption of big oil consumers, it really does not matter. With so many supplier choices, buyers have the luxury of picking and choosing. U.S. shale production, meanwhile, is also increasing. Growth is protected, to be honest, but it is there. And if it strengthens, it can lead after a new price war and another price invasion. This will only harden the cheap oil habit of China and India.
By Irina Slave for Oilprice.com
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