If you ask an oil company what the past five years have been like, they would probably have something to say about price crashes and destruction in demand. If you ask a major crude oil importer, they have a completely different perspective.
Maybe they price crashes that have allowed them to fill up on cheap crude oil, and maybe they even have something positive to say about the pandemic that has pushed prices to historic lows. And this is 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 curbing production. Success has been mixed for reasons beyond OPEC’s control. Nevertheless, it can be said that the efforts of the oil producers club are bearing fruit: oil prices are now at a much more comfortable level than a year ago. But buyers have become addicted to cheap oil and are looking for discounts. OPEC’s problem is that they find them.
The recent news that China had signed a long-term investment deal with Iran, in which oil played a prominent role, must have sparked some hackles among Iranian OPEC members. The news that China is already taking in much more oil from Iran is probably no cause for joy either. Iran is selling its oil cheaply because there are very few buyers while it is still under US sanctions. And China buys because of its heavy reliance on imports for its oil consumption.
Reuters reported Earlier this month, rising Iranian oil imports into China had forced other producers, including Russia, Angola and Brazil, to lower the prices of their crude oil to keep it competitive.
“These ‘sensitive’ barrels are hammering away at supplies from all over because they are just too cheap,” the report quoted a Chinese trader, referring to Iranian oil. Related: China’s Oil Buying Frenzy May End This Month
Saudi Arabia, meanwhile, did something motivated by either despair or hubris. The Kingdom, OPEC’s largest oil producer and extremely vulnerable to price crashes, said it would raise oil prices for Asian buyers – the world’s largest oil market and a driver of demand growth.
Of course China and India were not happy about it, but unlike in the past, when there were no alternatives to OPEC oil, there are now alternatives. India, which is an outspoken opponent of OPEC + attempts to increase prices as it imports more than 80 percent of the oil it consumes, immediately began diversifying.
For starters, the country has greatly reduced its orders for Saudi crude oil, according to sources quoted According to Reuters, the country’s four largest refineries had cut orders for Saudi oil by 36 percent in May, after the Kingdom announced a $ 0.40 increase in official sales prices for Asian buyers.
But India is also looking for non-OPEC suppliers. Indian media recently reported that Indian Oil Corporation will purchase an oil cargo 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 plans for diversification of oil supplies.
Major oil buyers have become accustomed to cheap oil and are unlikely to give up that habit anytime soon. Fortunately for them, there is plenty of supply and the suppliers have to sell it more than the buyers need to buy it, at least until demand picks up after the pandemic subsides. It may then change, but for now the outlook for demand remains uncertain.
Related: Why Iran’s Return to Oil Markets Isn’t a Major Threat
Meanwhile, oil-dependent economies, such as those that make up OPEC, need oil revenues to keep going and, at best, to fund their diversification efforts. The good news here is that the most recent OPEC and IEA demand forecasts are bullish. The bad news is that past bullish predictions have crashed into the wall of reality.
The IEA and OPEC expect a strong recovery in oil demand this year. According to a KPMG analyst interviewed CNBC last week, the recovery is said to be fueled by record vaccination rates in the UK and US, government stimulus measures and people’s pandemic fatigue.
Unfortunately, there seems to be a headwind for every tailwind. Vaccinations in the US may set records, but the number of new infections is also on the rise, and so are infections in India – an oil market that is arguably more important than that in the US. Stimulus is good news for all types of expenses, but it won’t be around forever. As for pandemic fatigue, this could spur demand, but with all the new rules for safe travel, recovery may not be complete or may take longer than a few months.
In other words, no one knows for sure yet how long demand will remain subdued. But when it comes to the cheap oil habit of major oil consumers, it really doesn’t matter. With so many supplier choices, buyers have the luxury of picking and choosing. Incidentally, shale production in the US is also growing. To be fair, growth is monitored, but it is there. And if it gets stronger, it can lead to a new price war and a new price deposit. This would only harden the cheap oil habit of China and India.
By Irina Slav for Oilprice.com
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