If oil prices are to continue their strong rally, they will have India to thank.
India has emerged as the “star performer” of the oil markets, the IEA wrote in its May Oil Market Report. Oil demand growth in India has surpassed that of China, the long-time cornerstone of global commodity demand.
Part of India’s sudden importance has to do with China. Demand growth for refined fuels in China plunged recently, down to 353,000 bpd in the first quarter of 2016 from a year earlier. That is down roughly 60% from a highpoint in the third quarter of last year at nearly 900,000 barrels per day (elevated levels that had a lot to do with filling of China’s strategic petroleum reserve).
But India’s demand for liquid fuels grew by 400,000 bpd in the first quarter, which was the fastest in the world, accounting for about 30 percent of the total global increase. “This provides further support for the argument that India is taking over from the China as the main growth market for oil,” the IEA wrote in May. That level of growth is all the more remarkable given that India’s oil demand grew at an average of just 120,000 bpd every year for the past decade, according to Bernstein Research.
The growth figures in India are striking: GDP is expanding at a 7.6% annual rate, gasoline demand is up 14.5%, and diesel demand is up 7.5%. The WSJ reports that 24 million new vehicles were constructed in India in the most recent fiscal year, and the government is targeting new road construction on the order of 30 km every single day. India’s vehicle fleet has doubled since 2007.
To fill all of those vehicles, India needs more oil. And with domestic production relatively stagnant, India has to resort to steadily higher imports. Crude oil imports have jumped by 12% so far this year from 2015 levels. Domestic refineries are running full tilt, and more capacity is needed.
According to Bernstein’s Neil Beveridge, India is at a “structural inflection point for oil growth,” with several factors responsible for the surge in demand: the government program to rapidly expand the nation’s highway system; rising per capita income; and a shift towards building out manufacturing capacity to make up a larger share of the Indian economy.
India is now more or less at the same per capita income levels as China in 2002 – a time when China’s demand for oil and other commodities started to skyrocket. Bernstein sees India undergoing a similar, if less intense, industrialisation and economic transformation. Oil consumption could grow at a 5.4% compound annual growth rate through 2021, or an increase of 1.45 MM bpd) over the next five years to 5.45 MM bpd. by 2040, India’s oil demand could rise to 10 MM bpd, a more than 6 MM bpd increase from today’s levels, which will also be the largest source of growth on the planet.
In other words, India is simultaneously contributing to oil demand in today’s oil market, putting a floor beneath prices, while India will also be the largest driver of oil demand over the long-term. China was largely responsible for the commodity super-cycle that began in the early 2000s that ended a few years ago. Companies that spent billions on coal mines in Australia, copper mines in Chile, or drilled oil wells in increasingly hard-to-reach areas of the globe – they all had China in mind when they put together their forecasts. But going forward, India will increasingly play that role.
And the next bull market could be starting sooner than many think. Bloomberg reports that commodity markets are about to enter bull market territory, as the Bloomberg Commodity Index – which tracks 22 different raw materials – is about to close up 20% from January levels. To be sure, the super-cycle price boom of a decade ago is not about to return, but the bear market has come to an end. The fortunes of commodity producers now rest with India.
Nick Cunningham, Oilprice.com, 8 Jun 2016
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It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.
And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.
That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.
The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.
In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.
The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.
But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.
With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.
But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.
A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.
End of Article