“OPEC+ Can’t Afford to Put More Oil on the Market Under Current Demand Scenario!”

Sara Akbar , Chairperson & CEO, OilSERV , Kuwait & Non-Executive Director, Petrofac

The war between Israel and Iran could have been a very serious matter, not only for the Middle East, but for the whole world, because the region supplies 25-30% of the world’s energy. But no one wants this war, and that’s why there was a lot of pressure on both parts of the conflict, not to escalate, which is why the oil price is where it is. The second thing which people tend to forget is that there is a huge increase in oil supply from outside of OPEC, including from the US. People don’t feel there’s a risk of supply and we also have OPEC+ spare capacity. That marginal capacity that exists in the market in case of any incident gives this cushion. Countries in OPEC+ which have been cutting volumes, would love to produce more. But they are being purposefully restrained because they see that if they put more oil on the market, prices will go to undesirable levels. There is a lot of pressure, even internally within OPEC, to do something about reversing the cuts, but they can’t afford to do that. We were in the same situation in 2014 when shale oil was booming, and we saw prices drop and everybody suffered dramatically. Do we want to go back to that scenario where we have a market share battle between shale oil and OPEC? I think people learnt their lesson, and we are better off at these levels. I think OPEC+ will continue to have these cuts going forward until they see demand pick up seriously, so I don’t think they will change anything in June.

Is the current price comfortable for OPEC Gulf producers?

If we have $80, it’s good and if we get $85, it’s even better, but they don’t plan for a price floor or a target. Gulf oil producing countries, at this point in time, see themselves as the place where East meets West, with huge interest from Asia and Western companies and governments who are interested in the region. We see ourselves as having the responsibility for securing reliability of energy supply for the world. If oil prices rise to $150 or $200, what happens to the rest of the world? We are already battling with inflation. I don’t see prices going up to those levels. As a matter of fact, I see them coming down a little more because of all the non-OPEC supply. Those marginal barrels are the ones that will dictate what pricing we get going forward.

Should we expect changes in OPEC quotas after June?

Last year, there were a few countries, such as Libya, Algeria and Nigeria, that could not meet quotas, but today, many of them have moved forward to do so. That will make it difficult for them get away with non-compliance. Discussions are ongoing with any countries, like Iraq, that have exceeded production quotas. It took so much time and hard effort to get to this agreement, so I think reopening it again will be very difficult.

What about Russia?

It has been very cooperative and has developed a very good relationship with the group. They all see the benefit of where oil prices are. Russia in particular which is in a war, is still economically in a good position because of these price levels. That is the driver for cooperation.

How might China be viewing tighter sanctions on Iranian oil?

What matters to China more than Iranian oil, is Iraqi oil, in which Chinese companies have a large interest. There’s more Iraqi oil going to China than anywhere else in the world, simply because of the amount of Chinese investment in those oil fields, as well as in Iraqi infrastructure, buildings, schools, and other areas.

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Over the last week, Gulf Intelligence has held high-level interviews with energy experts in the Middle East, Asia, Europe, and the US. This intel is harvested from the exclusive briefings.

ENERGY MARKETS VIEWS YOU CAN USE

Dr. Raad Alkadiri  	         		          
Non-Resident Fellow, Center for Strategic & International Studies        

The market has been in a ‘show me’ mode for some time.

When the fears of geopolitical risk are heightened and there are real concerns about physical disruptions to supplies, the geopolitical risk will start to play. And if we look at fundamentals, the market sees it is well stocked and protected. So, in the absence of something major that will take many barrels off the market, I think this is a market that’s going to remain sanguine.

Is US aid to Ukraine and sanctions on Venezuela and Iran bullish for oil prices?

There are the headlines of tougher sanctions or escalation in the fighting in Ukraine, and then there’s the reality of US gasoline prices easing in the last week, for example. Saying something and doing something is very different and that certainly applies with sanctions. In the case of Venezuela, while the waivers weren’t renewed, the license for Chevron was left in place, and that’s been critical in terms of increasing Venezuelan production over the past six months and stabilizing production moving forward. In the case of Iran, sanctions have always been tough, but the question has always been implementation and whether the US willing to increase tension with China or willing to intercede barrels at sea in the Persian Gulf, or indeed further afield and risk something happening in the Straits of Hormuz.

How would you rate Biden’s management of the Middle East?

It has been destabilizing. The embrace of Israel in many ways, has backfired in the sense that it’s given the US a bit of influence over the management of Israeli policy, but probably nowhere near as much as it had hoped. What will matter most is what happens in the region, not necessarily what happens outside of it, and what Benjamin Netanyahu wants to do is protect his political future. We did see some restraint from Israel in terms of targeting of Iran, and that may be one of those times when the US had a significant influence. The Israelis aren’t keen to take on Iran on their own.

Victor Yang          		           
Senior Analyst, JLC Network Technology        

We expect China to achieve its growth target of above 5% this year.

Consumer confidence is picking up and economic sentiment is better now than at the end of 2023. We’ve seen industrial activity grow 1.3% in the first quarter. Gasoline and jet fuel demand have risen since the beginning of the year, and we expect another surge around the holidays at the start of May. But for some other products such as diesel, demand is not picking up so much.

Outlook for crude oil imports in Q2?

Imports grew by 7.5% in the first quarter. Crude from Russia alone surged by close to 13%, recording a record high share of total imports in March of over 22%. Pushing this has been rising gasoline and jet fuel demand because of growing refining capacity. But overall, we still expect slower crude demand growth this year than in 2023. In Q1, it was 0.75% and we expect modest growth of about 1.1% for the whole year if crude prices are high. Refinery maintenance during Q2 will also dampen demand. Margins, including for Russian crude, turned negative at the end of March, and are just about breaking even today, so we’re not expecting imports to grow much in the second quarter.

What do you expect to see in government stimulus measures this year?

One of the ways it has chosen to stimulate consumption is to extend the May public holiday from one to five days, to encourage more travel and expenditure. But otherwise, government stimulus will not be as it used to be. It is not stimulating certain industries as robustly as before because it is trying to push for an industrial upgrade. Also, although the government might want Chinese oil refineries to export more oil products, to boost the economy, it is also under pressure to achieve its emission targets, so it needs to strike a balance.

Alan Gelder  
Downstream Global SME, VP Refining, Chemicals & Oil Markets, Commodities Research, Wood Mackenzie        

Outlook for Russian crude and products exports?

We’ve seen a bit of a surge in exports in April because of unplanned refinery maintenance or the impact of the Ukraine drone attacks. We’re seeing sustained significant crude flows back up in those rangebound levels and a return to distillate exports, so the Russian energy infrastructure seems to be back to normal and given the US funding now, Ukraine won’t target energy infrastructure, ports and loading facilities. So, Russian diesel and gasoil will keep running strongly. There is a need for more Russian gasoline during the summer because of domestic travel, so that keeps the runs high, which means Russian diesel exports remain strong. And they’re going to whole new trade routes, with Brazil being the predominant buyer, and some going to North and West Africa, depending on pricing. We’ve also seen bits go into the Middle East and a lot of sanctioned arbitrage is happening, which we expect to continue. Having seen a lot of strength in diesel cracks earlier in the year, we’ve not really got them recovering very much because the European economy is weak. We think the world has probably got enough diesel. It’s gasoline that’s going to drive things in the shorter term.

Indicators for Chinese exports of oil products?

We’ve seen China importing significant volumes of crude in Q1 which is the classic first half the year inventory build that then largely gets processed through the year. We’ve had quite strong Chinese GDP growth, but it’s been a particular sector rather than broader construction. We’re looking at Chinese refinery runs remaining reasonably high and volumes continuing to come out of China, and that will keep a lid on Asian refining margins.

Janiv Shah 	        		      
Vice President, Oil Markets; Refinery & Crude Balances Lead, Rystad Energy        

Russian refinery rates are at their lowest point in nearly 11 months.

That’s concerning as we ramp up into the summer demand season and global demand season overall. We’re still seeing secondary markets where Russian diesel and other products can flow to the likes of Brazil, North Africa and elsewhere and where demand is slowly picking up for middle distillates.

What impact could stricter sanctions on Russia have on oil flows?

If sanctions do impact the market further, there will be more rerouting. The global refining system needs crude, and the types of crudes that are produced in fairly large quantities and volumes and of the correct quality are the ones that are being impacted by sanctions the most. If Russian grades can’t get to destinations via the secondary market, we would certainly see upside price potential to crude, and middle distillates for which demand is set to increase in the next couple of months. To avoid that, there has to be a mechanism to allow for these flows to come to the market.

Is the geopolitical disruption worsening for shippers?

The pinch points in the Middle East and Bab Al Mandeb area have increased the ton miles for shippers as we see rerouting from the area and from Asia to Europe, and therefore higher demand for consumption of certain types of fuel oils. That calls for a higher yield of refining to produce these types of finished products. And putting aside geopolitics, elsewhere there’s another element of disruption, and that is the expansion of the Trans Mountain Pipeline, which is taking flows of Canadian crudes away from the pipelines that went into the US Gulf Coast in PAD 3, towards the US West Coast, and then export of these via ships, which increases the call on vessel availability towards Asia. Of course, all these costs are likely to be passed onto the refiner and then onto the end-product use demand holder.

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