AS the demand side of the global crude equation continues to attain weight, the supply side of ‘crude’ economics has seemingly lost the battle.
Not too long ago, the Organisation of Petroleum Exporting Countries (Opec) was the dominant force in the crude markets. We all grew up with the notion ‘the world is at the mercy of Opec’. Oil prices would surge or plummet on just a whisper from Opec and its wheelers and shakers.
Those days are now over!
New variables are now crowding the global crude equation. US shale output was a real game-changer. It transformed the energy world. Overtaking Saudi Arabia and Russia, the United States of America has assumed the mantle of the global swing producer.
Opec’s control on markets is but, dwindling. It is no more in the position to influence the global markets alone. To change the psyche of the market, it needed the support of Russia, the other heavyweight of the energy world.
The US-Iran imbroglio, loss in Venezuelan crude output, the ongoing strife in Libya and now Iraq, also helped the Opec, or whatever was left of it, achieve stability in the market and sustained its influence.
To be fair, Opec’s capacity to stimulate the markets was visible until recently. Amid a major oil-price crisis, on November 30, 2016, the Opec announced it would cut production for the first time in eight years. Markets surged, even before the announced cuts were implemented. Market sentiments helped boost crude prices from a $50.74 close on that day to $54.94 at the close on December 5, 2016, Anes Alic wrote in a recent piece.
This phenomenon continued until the last quarter of 2018. When on December 7 last year, the Opec agreed to an output cut of 1.2 million barrels per day (bpd), oil prices went up from $57.83 at the close on December 6 to $61.71 at the close on December 7.
But things then began changing. By July 1, 2019, when Opec and allies agreed to extend production cuts for another nine months, the bling in its announcements had already been dulled, Alic underlined. Not only did oil prices fail to jump, but they moved in the opposite direction. From a closing price of $67.52 on June 28, Brent dropped to $65.01 on July 1 and then plummeted to $62.72 the following day.
Demand, and not supply was now the new king. And with global demand faltering, markets appeared more focused on demand than supply. As per the International Energy Forum’s Joint Organisation Data Initiative (JODI), despite the soft market prices, the global crude consumption between June and August this year, went up by only 1.6 per cent than last year.
And most of this growth came from China. Although China’s economy has not been growing as strongly as before, it is still growing and not contracting. If it weren’t for China, the consumption picture would look even worse. Excluding China, the 18 largest global oil consumers would have recorded a combined consumption decline of 0.9 percent during the period.
The spike in oil consumption in China is easily explained: a 400,000bpd new refinery came on stream in May this year and another one with the same capacity was put into operation later. And this manifested in the uptick in the Chinese crude demand.
European economies are just trudging along, while Germany, the European industrial powerhouse has just narrowly escaped a recession in the third quarter. The American economy has been growing, yet, the threat of a recession stays.
India has been posting positive growth rates, but these have been slowing down for six quarters in a row and analysts are revising their future growth projections downward, commentators have been writing. Elsewhere, manufacturing activity has been weak, Reuters’ John Kemp notes, pointing out that freight movements have declined too.
How important is the Chinese consumption for the crude markets is also evident from the fact that markets continue to move up or down, on news about the trade war between the US and China. Oil markets gain, on a daily basis, on the slightest hint of optimism in ongoing China-US trade talks on the issue, and it drops when prospects of a breakthrough in talks go down.
While the supply side of the global energy balance is taking a hit, the prospect of markets surging, if the Opec and its allies opt to roll over output cuts at their ministerial next week, remains just a remote possibility.
In the meantime, China continues to drive crude sentiments.
Published in Dawn, December 1st, 2019