“Oil Prices Will Only Rise If Mideast Escalates into Wider Regional Conflict!”

Emily Stromquist , Managing Director, Teneo

We’re all very well educated on the impact that geopolitics can have on energy prices and on driving volatility, but the conflict in the Middle East seems to have defied expectations, for market bulls, in particular. Any risk premium seems to be baked into prices around the $85 per barrel range. It’s probably because of the non-OPEC supply growth which has gone up considerably in the past couple of years, and significant OPEC spare capacity. There are no concerns about significant shortages, and there haven’t been protracted outages or significant disruptions to oil flows. The only thing right now that could drive up prices in a more sustained way would be either a sustained attack that affected the Strait of Hormuz, or an escalation that could draw in Gulf countries. There’s been plenty of signals and reassurances that neither Israel nor Iran wants a larger regional conflict.

How might US aid to Ukraine impact Russia’s war effort and energy sector?

The $60 billion package isn’t going to go that far in terms of changing the course of the conflict. It will bolster up Ukraine’s defenses for the next 12 to 18 months. The aid is intended to keep Russia from achieving a large victory this year, but there’s still no discussion about what an exit ramp looks like, so it doesn’t change the outlook for Russian energy markets. The bigger question is more about price caps and sanctions and what impact those will have. Russia has frequently proven itself resilient against sanctions. It has managed to continue receiving considerable profits from oil, benefiting from higher prices. The IMF has already adjusted their forecasts up for this year to over 3% GDP growth in Russia. On the price cap issue, Russia has built up a large shadow fleet, shifted a lot of their exports to China and India, and found alternative insurance mechanisms.

Would stronger US sanctions on Iran impact market dynamics?

Iran is exporting more today than it has in the last six years. Most of it - about 1.5 million b/d or more, is going to China. To have a real impact on Iran, sanctions would almost have to target the direct link of exports to China and that’s very unlikely. Biden is disinclined to pursue Trump-like maximum types of measures. The US approach has largely been to target individual tankers for the time being, but it has had a very limited impact. The US-China dynamic is going to be a huge election issue in the US, with Biden criticized very regularly for being soft on China.

Could we ever see Europe reverting back to reliance on Russia gas?

To be bullish on the outlook for Russian gas in Europe, you would have to assume a rapid and smooth conclusion to the conflict in the next year or so, and that’s very difficult to imagine. Strong new LNG growth coming into the market also gives Europe more optionality. Russia’s gas transit contract with Ukraine runs out at the end of the year. It has already shifted to selling more LNG, so it depends whether sanctions take a heavy toll on that. Gazprom has just posted its first net loss since 1999 so the company is certainly struggling under current market conditions. There’s also very limited opportunity on the Power of Siberia or other never realized pipeline deals with China. So, it’s not a particularly promising outlook for Russia’s gas industry.

Is Energy Security starting to overshadow Energy Transition?

It has been granted more weight in recent years but decarbonization considerations are not going anywhere. We’re moving towards clean energy and investment interest is certainly accelerating as costs continue to fall. A doubling of clean tech additions is expected by 2030 and the price per kilowatt hour is expected to come down by about 20%. The Energy Transition is also undergoing a pivotal moment of its own navigating the new trend of multipolarity in the world. Weaker global leadership on multilateral platforms has driven a divergence in national policies. There’s no real consensus about an appropriate energy mix as we embark on these transition paths. In this context, industrial competitiveness is becoming a real concern and that’s driving protectionist policies.

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ENERGY MARKETS VIEWS YOU CAN USE

Michelle Wiese Bockmann 
Principal Analyst, Lloyd’s List Intelligence        

Are more stringent sanctions on shippers curtailing Russia’s oil exports?

There’s very little substantive action. Shipping continues to exit Russia. About half of it is on what we call a dark or parallel fleet of tankers that operate outside Western regulation. For the full month of April, those tankers have been moving further outside regulatory oversight. All sorts of shenanigans are happening to keep Russian, Iranian, and Venezuelan oil flowing, including using false flags. According to our methodology, about 11-12%, or 600 tankers, of the internationally trading tanker fleet is involved in those three sanctioned trades. Vessels are engaging in ship-to-ship transfers to operate outside Western jurisdiction. We’re watching them very closely. There are five such tankers at the moment operating in Russian trade, despite being US sanctioned. They continue to sail and engage in deceptive shipping practices like spoofing their location. The lengths traders go to ensure oil continues flowing are quite extraordinary from a regulatory perspective. Regulators are weighing their options, but they haven’t wielded a big stick yet. I think they are hesitant to cause a price shock, especially in an election year for the US.

Are you seeing anything that indicates the US is tightening its grip on Iranian oil?

I have seen some companies sanctioned, but I haven’t seen any reduction in flows. It’s a completely parallel market now. I’m looking at physical indicators to see if they provide any guidance on oil demand in the next 3 or 4 months. For example, I’m looking at ton-mile demand, which serves as a proxy for tanker demand. It measures volumes carried by distance traveled. Ton-mile demand for tankers was at a record last quarter. It has diminished now, but there’s still a lot of strength in the tanker market. For instance, diesel demand in Europe is in contango, suggesting that the situation bears watching as it might indicate what will happen over the summer.

Clyde Russell 
Asia Commodities & Energy Columnist, Thomson Reuters        

How is China managing amidst fluctuating energy prices?

Imports of iron ore, coal, and LNG surged in the first four months of the year. The common thread was their weakened prices in Q1, which may have stabilized in recent weeks. Conversely, imports of crude oil and, to a lesser extent, copper, saw a decline, coinciding with their upward price trends. This was evident in April’s crude oil imports, which at 10.88mn b/d, mark the lowest since the previous April. In the second half of the year, I anticipate a slight increase in crude imports, with structural factors such as the commissioning of new refineries. Moreover, there will likely be heightened demand for diesel and jet fuel as relevant sectors recover. A base above 11mn b/d, seems plausible for crude imports, assuming prices remain between $80 and $90/bl.

Are consumption patterns inside China adjusting in response to higher oil prices?

Assessing stock levels in China poses challenges. While April’s numbers are pending, analysis of the first quarter indicates stockpile accumulation. Concurrently, refined fuel exports were lower compared to the same period last year. These trends suggest subdued demand in China.

Expected action by OPEC+ at their June meeting?

There’s a reluctance within the OPEC+ alliance to deepen output cuts to bolster prices further. Instead, indications suggest they are leaning towards extending existing cuts. From OPEC’s perspective, current oil prices still fall short of the desired levels, ideally hovering around $90 rather than the current $80 range. To achieve this, maintaining output cuts seems the preferred strategy, banking on a potential economic upturn in China and the broader global market in the latter half of the year. While signs of a Chinese economic recovery are emerging, cautious optimism is prudent until data confirms the trend.

Mike Muller
Head, Vitol Asia        

Geopolitical turbulence still hasn’t severely disrupted oil supply.

That’s why we have now moved from a stronger Q1, which had the added hype of cold weather, into a softer Q2 trading window. We’re also through the period of uncertainty, which is characterized by refinery turnarounds every springtime. People are doing forward stock projections and factoring the latest inputs on the demand side of the equation, where there continues to be concern over Chinese growth rates. Still, 2024 is going to go down as one of the top five years for demand growth year on year and prices in the low $80s are not at a level that many producing nations will be too upset about.

Can Chinese demand at least in principal support a price floor of $80?

There are several notable developments in China that are gradually emerging. In particular, the petrochemical sector is experiencing significant growth, with the commissioning of three new ethylene crackers. These will require import feedstock and will boost oil demand. Sectors other than construction in China are showing healthy signs, especially in manufacturing. The construction sector does however remain crucial, impacting industries like steel, copper, cement, asphalt, and indirectly affecting oil and diesel demand. Furthermore, 2024 marked the year where LNG has become competitive with diesel in certain segments of road transport in China, as well as in maritime sectors. This shift is evident in the gradual commissioning of dual fuel vessels, particularly in major hubs like Singapore.

Should we expect more government stimulus in China this year?

It will still aim to stimulate the economy, particularly the construction sector, but with caution. Observations from travelers returning from China indicate a subdued sentiment, with a noticeable decline in Chinese tourists traveling abroad due to economic uncertainty. Many Chinese investors, particularly middle-class holidaymakers, have seen their disposable income diminish due to stalled property investments, leading to a preference for domestic spending on consumables.

Could the call on OPEC+ oil grow in H2 because of sanctions?

The volumes of Iranian oil flowing primarily to Asian markets appear to remain consistent. In Venezuela, we’re currently operating under an extension to General License 44, even though what comes next is uncertain. There are ongoing lobbying efforts in Washington for exemptions, but even if the license were to expire, Venezuelan oil flows would likely continue, albeit redirected to different markets. China may see increased imports while other traditional markets, such as India and Europe, may see a decrease.

Ali Al Riyami 
Consultant & Former Director General of Marketing, 
Ministry of Energy & Minerals, Oman        

What is OPEC likely to decide about future volumes at its June meeting?

The big question is whether the voluntary cuts will be extended. This dilemma might need to be addressed outside of OPEC meetings because it involves countries agreeing independently to propose measures to balance the market and improve prices. His Royal Highness Prince Abdulaziz will probably not wait until the last minute to decide whether to continue or make other adjustments. We’ve already seen negotiation tactics from the Iraqi minister who first announced opposition to extending or increasing cuts and then changed his statement the next day. These tactics are common before entering discussions. I believe we need to extend the cuts, perhaps for another three months or until the end of the year. The June meeting will likely be a review of normal market conditions rather than involving lengthy discussions; I think agreement will be reached on voluntary cuts before the meeting.

Has geopolitical risk been eliminated from the oil price?

The price rise to $93 was driven by the Iran-Israel conflict. Once that tension eased, prices corrected themselves, bringing the market back to a more stable range of $83 to $85. There are still tensions, like the ongoing issues in the Red Sea and Gaza. Hezbollah is also increasing its attacks. However, the market isn’t responding strongly because these tensions are somewhat removed from key oil-producing areas and haven’t affected supply. The ongoing conflict between Ukraine and Russia also remains a concern, with drone activity continuing. So, while political tensions persist, the major factors previously driving the market have temporarily eased, keeping prices at their current levels.

Is fiscal pressure pushing some OPEC+ members to seek a higher price?

A range of $83-$85 may be suitable for some, but countries like Saudi Arabia may require more due to their expenditures and investments. However, in general, I believe anything above $80 benefits both producers and consumers. Prices exceeding $95 or $100 are unsustainable and detrimental to the market and the global economy. Therefore, maintaining prices between $80 and $85 is optimal for everyone, despite some countries possibly not favoring this range.

Christof Rühl
Senior Research Scholar - Center on Global Energy Policy
Columbia University        

How do you explain the downward draft in oil prices in the past month or so?

The fundamental reason is abundance of oil worldwide, driven by significant spare capacity and continued robust US shale production growth. The market does continue to closely follow developments in Gaza and any escalating tensions in the wider region. These geopolitical factors, along with fluctuations in the dollar, actions by the US Fed, and other factors, play into the underlying political outlook, keeping fluctuations within a relatively narrow band that stakeholders can manage. Additionally, we see declines in diesel demand signaling slowdowns in industrial activity, particularly in the US and China, reflective of broader economic trends influenced by globalization and interest rates, as evidenced by recent labour market data in the US.

What’s the correlation going forward between Fed policy and oil prices?

There is a connection, albeit indirect and weak, often manifested through fluctuating growth expectations. Historically, anticipation of interest rate hikes has buoyed markets due to positive implications for US growth. However, recent fluctuations in oil prices have been predominantly driven by geopolitical factors, rather than by rate discussions, partly because of the robustness of oil supply and relatively stable demand-side expectations. China stands out as a key player in global oil demand. Sentiments are veering toward pessimism, but observations from within China also suggest a gradual recovery and a bottoming out of economic concerns. This, coupled with prospects of weakening growth and the possibility of interest rate cuts, could provide a positive spillover effect into other markets, mitigating potential oil price declines based solely on supply-demand fundamentals.

How is OPEC+ likely to address quotas for the group given market conditions?

The primary fault line within OPEC lies between Saudi Arabia and the UAE. The recent announcement by the latter regarding its official increase in production capacity is a significant development that underscores the ongoing tension within the organization. While Saudi Arabia has traditionally carried the spotlight, the burden of costs, particularly in percentage terms, falls heavily on the UAE. We should also keep an eye on what Russia says and does, as a key player in the alliance. Despite the country’s consistent announcements of production cuts, the data often tells a different story, highlighting potential discrepancies within the group. Ultimately, any resolution may require a delicate balance and negotiations between Saudi Arabia, the UAE, and Russia, with each party holding its ground.

Victor Yang
Senior Analyst, JLC Network Technology        

China’s crude imports in Q1 grew 2%, slightly below the daily average in 2023.

For May, June and July, imports could drop slightly. We have peak maintenance in April and May, but refineries are not going to necessarily hike crude runs after that. PetroChina aims to raise its crude throughput by 5.1 million barrels for the entire year. In the first quarter, it had already boosted its crude runs by 27 million barrels, so to stick to the 5.1 million growth target, it will need to cut runs in the coming months. And for independent refiners in Shandong, run rates are already at two-year lows, so throughput is declining.

Do you expect more stimulus for the economy this year?

Starting tomorrow, the government will be issuing quite a few batches of bonds through to November, to the tune of about one trillion Chinese Yuan in total. The aim is to help local governments complete projects in the construction sector, a requirement before they can access central government support. That should drive investment and consumption, employment and diesel and oil demand too.

How would you assess China’s appetite for Russian crude versus last year?

Russian barrels are mostly taken by China’s independent refiners in Shandong. Premiums have changed from around $10 below Brent crude, to about $1 or sometimes flat. For most of April, margins for refining Russian barrels turned negative for independents. There’s been some improvement since, but they’re still not very attractive at $2 per barrel. Last year, the discounts on Russian crude were sometimes above $10 against Brent and the margins were quite high, sometimes about 800-900 Chinese Yuan per metric ton compared to just above 100 Yuan today. So, it has changed quite a lot.

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