By Irina Slav
If you ask an oil major what the last five years have been like, they would probably have something to say about price crashes and demand destruction. If you ask a large importer of crude, they’d have a completely different perspective.
They may well praise price crashes that have allowed them to fill up on cheap crude, and they might even have a positive thing to say about the pandemic that brought 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+, has been working for years to keep international oil prices higher by curbing production. Success has been mixed for reasons outside OPEC’s control. Still, it can certainly be said that the efforts of the oil producer’s club have mostly paid off: oil prices are now at a much more comfortable level than they were a year ago. But buyers have gotten hooked on cheap oil and are looking for discounts. OPEC’s problem is that they are finding them.
The recent news that China had inked a long-term investment deal with Iran, in which oil featured prominently, must have raised some hackles among Iran’s fellow OPEC members. News that China is already taking in a lot more oil from Iran is unlikely to have been a reason for joy, either. Iran is selling its oil cheaply because there are very few buyers while it is still under U.S. sanctions. And China is buying because of its heavy dependence on imports for its oil consumption.
Reuters reported earlier this month that rising Iranian oil imports into China had forced other producers, including Russia, Angola, and Brazil, to cut the prices of their crude in order to keep it competitive.
“These ‘sensitive’ barrels are hammering supplies from everywhere, as they are simply too cheap,” the report quoted a Chinese trader as saying, referring to Iranian oil.
Saudi Arabia, meanwhile, did something that was motivated either by desperation or overconfidence. The Kingdom, which is OPEC’s biggest producer of oil and extremely vulnerable to price crashes, said it would raise oil prices for Asian buyers: the world’s biggest oil market and demand growth driver.
Naturally, neither China nor India were happy about it, but unlike in the past, when there were no alternatives to OPEC oil, now there are alternatives. India, which has been a vocal opponent of OPEC+ efforts to boost prices since it imports more than 80 percent of the oil it consumes, immediately started diversifying.
For starters, the country has sharply reduced its orders for Saudi crude: according to sources quoted by Reuters, the country’s top four refiners had cut their May orders for Saudi oil by 36 percent, after the Kingdom announced a $0.40 hike in official selling prices for Asian buyers.
But India is also looking for non-OPEC suppliers, too. Indian media recently reported that Indian Oil Corporation will buy an oil cargo from Guyana—the newest member of the global oil producers’ club. According to government officials, the price of the Guyanese oil was competitive, and the purchase was in line with oil supply diversification plans.
Big oil buyers have become used to cheap oil, and they are unlikely to give up that habit in a hurry. Fortunately for them, there is plenty of supply to go around, and the suppliers need to sell it more than the buyers need to buy it, at least until demand rebounds after the pandemic recedes. Things may change then, but for now, the outlook for demand remains uncertain.
In the meantime, oil-dependent economies such as the ones that comprise OPEC need oil revenues to keep going and, in the best-case scenario, 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 earlier bullish forecasts have crashed against the wall of reality.
The IEA and OPEC expect a strong rebound in oil demand this year. According to one KPMG analyst interviewed by CNBC last week, the rebound would be fuelled by record vaccination rates in the UK and U.S., government stimulus and people’s pandemic fatigue.
Unfortunately, for every tailwind, there seems to be a headwind. Vaccinations in the U.S. may be setting records, but new infection numbers are also on the rise, and so are infections in India—an oil market arguably more important than the U.S. one. Stimulus is good news for all sorts of spending, but it won’t be there forever. As for pandemic fatigue, this could boost demand but with all the new rules around safe travels, the rebound may not be complete or may take longer than a couple of months.
In other words, nobody still knows for sure how long demand will remain subdued. But when it comes to big oil consumers’ cheap oil habit, it really doesn’t matter. With so much supplier choice, buyers have the luxury of picking and choosing. U.S. shale output, incidentally, is also growing. Growth is guarded, to be fair, but it’s there. And if it strengthens, this could lead to a new price war and another price collapse. This would only harden the cheap oil habit of China and India.