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Oil prices volatile to output decisions

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Global energy markets continue to be volatile, with major producers saying their cartel decisions to cut production and hike prices were justified.

Saudi Arabia will keep supplying at least several refiners in North Asia with full contractual volumes of crude in May, despite the 500,000 bpd Saudi output reduction as part of the latest OPEC+ cuts beginning next month.

ExxonMobil has reportedly held preliminary talks with Pioneer Natural Resources Co about a possible acquisition of the US shale oil producer.

The expectation since OPEC+ announced new, voluntary production cuts is that the rate of US production growth will not change much despite the decision’s upward effect on prices. This is because it has grown since the pandemic-fueled collapse but remains well below its pre-COVID peak.

Capital discipline has been a big theme as producers and investors emphasise returns over volume. High input costs are also a check on production.

In effect, the production cuts announced last week by OPEC+ have sent the oil price back to the levels before the banking crisis. So, what is all the fuss about?

Saudi Arabia’s policy is to maintain oil prices at around $90 per barrel. So, the cuts were inevitable.

The OPEC decision was partly intended to drive out short sellers from the crude oil market. And it succeeded.

Concern about further US interest rate hikes that could curb demand has now balanced the prospect of a tighter market due to the supply cuts from OPEC+.

But analysts, who had (unjustifiably) slashed price forecasts in the wake of the banking sector crisis in mid-March, raised their price estimates and started talking about $100/b this year again.

In other words, as should have been expected, we have returned to pre-banking-crisis conditions.

Some investors are optimistic about a potential recovery in China’s oil demand, which could push prices towards $100/b in the second half of the year.

Oil surplus

A large oil surplus started building in late 2022 and spilt over into the first quarter of the current year.

The OPEC+ cuts will eventually eliminate the surplus built up in the oil markets, after which prices should go up.

The price caps on seaborne Russian oil sales serviced by western shippers, insurers, and legal providers and on Russian refined oil products were weakened by inherent contradictions.

Russian oil continues to flow, and the verdict on their effectiveness is mixed at best.

India’s fuel demand increased by 5% in March compared to a year earlier, reaching 20.5 million tons.

Demand for gasoline and diesel climbed in March compared to March 2022 and February this year.

This coincides with record-high crude oil imports from Russia, with Indian refineries snapping up cheaper Russian crude. As a result, Russia is now India’s top oil supplier.

India is not abiding (and doesn’t intend to) by the G7 price cap as it seeks opportunistic purchases of cheap crude.

The EU’s embargo on Russian oil products, which went into effect on February 5, has resulted in the diversion of Russian diesel to Asia, Africa, and the Middle East and increasingly to Latin America.

In March, Russia exported more than 580,000 tonnes of diesel to Latin America, with 440,000 tonnes going to the Brazilian market.

Turkey has also been scooping up Russian diesel that would normally have gone to Europe.

In mid-March, some 500,000 tonnes of Russian diesel were discharged in the UAE and Saudi Arabia, compared to almost nothing a year ago.

China demand

France and China signed cooperation deals in nuclear and renewable energy during a state visit of French President Emmanuel Macron.

Coal plant project cancellations accelerated in 2022 – except in China, where planned capacity increased by 126 GW, far offsetting changes in the rest of the world.

Reuters reported that Chinese airlines are undertaking massive hiring drives to position for an expected rebound in travel demand this year after the country relaxed most anti-COVID restrictions.

A recovery in Chinese travel demand is expected to be one of the biggest drivers of crude consumption this year at a time of tighter oil supply in the coming months.

Despite the US climate law’s industrial policy focus, heavy reliance on China and a few other nations for key materials used in low-carbon tech will remain.

Climate change

The UN International Panel for Climate Change (IPCC) issued a report in mid-March that makes alarming reading.

Global warming is becoming increasingly dangerous, with irreversible consequences, should the world fail to change course.

The IPCC called for an immediate stop in fossil-fuel consumption and a rapidly accelerated switch to clean energy.

Global energy demand continues growing, but renewables and clean energy technology are not growing fast enough to cover this growth, let alone replace fossil fuels.

According to Bloomberg and the International Energy Agency, investments in clean energy must increase by a factor of 3-4 from current levels and remain at that level every year if the world is to achieve net zero by 2050.

 

Dr Charles Ellinas is Senior Fellow at the Global Energy Center, Atlantic Council

Tw: @CharlesEllinas