OPEC Cut Failed To Lift Oil Prices, But The Year Isn’t Over Yet
Crude oil prices have been on a losing streak for four consecutive weeks now, erasing all the gains they booked after OPEC’s latest supply cut announcement as economic fears take precedence over demand expectations. When the cartel announced the cuts, almost every bank with a commodities department rushed to update their price forecasts, expecting prices to jump even higher than before. Morgan Stanley was a rare exception: it revised its price forecast for oil downwards. “OPEC probably needs to do this to stand still,” Martijn Rats, chief commodity strategist at the investment bank, said at the time, adding that the OPECc+ decision “reveals something, it gives a signal of where we are in the oil market. And look, let’s be honest about this, when demand is roaring…then OPEC doesn’t need to cut.” He seems to have been right, for the most part. Only it’s not demand itself that was the problem. It has been the popular expectation of worsening demand that has been driving the price decline. Indeed, the daily media updates on oil prices have, in the past four weeks, repeated the same refrain over and over again: weak U.S. and Chinese economic data, fears of more interest rate hikes in the U.S., fears of a recession, which is already a fact in certain industries, notably freight transport. Clearly, these expectations have had a sound basis. The thing about oil demand, however, is that the U.S., or the rest of the developed world, is not where additional oil demand will be coming from in the rest of the year and future years. It’s the developing world that will see growth in oil demand with the potential to drive prices higher. Dutch ING said in a recent oil market update that while oil prices remain depressed for now, things could very well change in the second part of the year, with a deficit looming on the horizon. The basis for this forecast is a combination of lower OPEC+ output, higher demand outside the OECD, and a smaller-than-expected growth in U.S. output, according to ING. What’s more, there is always the possibility that OPEC+ will cut output again, adding to oil’s upside potential. The Dutch financial services major is not the only one expecting higher prices later this year. Citi’s commodities head Ed Morse recently told CNBC that oil prices may have bottomed out, and we’re entering peak demand season in the much more populated northern hemisphere. “OPEC+ output cuts and a rebound in China’s demand will likely offset slower demand elsewhere … Therefore, we expect prices to bottom out soon,” the Commonwealth Bank of Australia said in a note from early May. Goldman is another bank that’s optimistic about the immediate future of oil prices. In a note from early March—weeks before the surprise OPEC+ cut announcement, the bank said Brent could reach $100 by the end of the year if OPEC keeps its 2-million-barrel output cut agreement in place. Again, that was before the OPEC+ additional cut announcement that temporarily boosted prices. And it might well boost them once again as the year progresses. All it would take would be a more optimistic economic update from either China or the United States. Of course, all these are only projections based on historical data and some common sense. The thing about markets, however, is that they do not always obey common sense but tend to get swayed on a dime. The past four weeks are evidence of that, with oil traders largely ignoring any fundamentals to focus on what banks call the macro picture. They have ignored data about Chinese refinery throughputs and oil imports to focus on the latest PMI, which has shown a contraction in the country’s growth pace. They have ignored data about U.S. production trends to focus on the April CPI reading, which showed inflation remains a substantial problem. All this is perfectly understandable: the so-called macro picture has a huge bearing on oil demand, which tends to decline in times of high inflation and rising interest rates. The thing that gets forgotten, however, while watching that macro picture is that oil, for all its bad rap, is what economists call an inelastic commodity. This means that whatever the price for the commodity, there will always be strong demand for it. And this, in turn, means that it might be time for traders to focus a bit more on the supply outlook. Because when supply tightens, prices will rise—demand will be going nowhere, even in inflation-stricken U.S. What’s more, as ING noted in its oil market update, OPEC+ is aware of the power it can wield in output control. There is nothing to prevent it from doing it again should prices fall too low for its liking. After all, how much market share can it lose?
BPCL Signs Exclusive bunkering Rights with Cordeilla Cruises for the West Coast
BPCL Signs Exclusive bunkering Rights with Cordeilla Cruises for the West Coast Mumbai, May 15, 2023: BPCL is pleased to announce its exclusive bunkering partnership with Waterways Leisure Tourism Pvt Ltd, the renowned operator of Cordeilla Cruises, one of the most luxurious fleets of cruise liners in India. As per the Memorandum of Understanding signed between the two companies, BPCL will be the sole provider of Very Low Sulfur Fuel Oil (VLSFO) as a bunkering fuel for the Cordeilla Cruises brand along the west coast of India.
GAIL to build Maharashtra ethane cracker at Rs 400 bn
GAIL (India), the leading gas supplier in the country, plans to construct an ethane cracker worth Rs 400 billion near its liquefied natural gas (LNG) import plant in Maharashtra, according to two insiders with direct knowledge of the matter. The move aims to meet the anticipated surge in demand as Indian companies boost their petrochemical production capacity due to the expanding economy, requiring more goods ranging from plastics to paints and adhesives. A cracker produces ethylene, which is necessary for producing products such as plastics. By 2040, the demand for petrochemicals is predicted to triple, necessitating significant investments to establish new facilities throughout the country, according to estimates by top refiner Indian Oil. GAIL is looking for land in the coastal region of Dabhol in Maharashtra for the 1.5 million tonne per year cracker project and intends to import ethane from the US for the scheme. The company is also exploring the possibility of acquiring land in Madhya Pradesh, which borders Maharashtra, if a deal in Dabhol fails to materialise. The proposed dual-feed cracker will also have the ability to crack up to 40% liquefied petroleum gas (LPG), allowing the option to switch to a less expensive feedstock to maximise margins. India’s per capita petrochemical consumption is around one-third of the global average, with Asia’s third-largest economy consuming 25 million to 30 million tonne of petrochemicals annually. Also read: Tata Power’s TP Saurya signs solar project in Rajasthan Rajasthan seeks bids for KUSUM Program-Eligible 452 MW solar projects
India cuts windfall tax on petroleum crude to zero
India cut windfall tax on petroleum crude to zero from Rs 4,100 per tonne with effect from May 16, according to a government notification. The windfall tax on petrol, diesel and aviation turbine fuel (ATF) was left unchanged at zero. In early May, the govt had slashed windfall tax on domestically produced crude oil to ₹4,100 per tonne from ₹6,400 per tonne. In the revision before that, the government had reimposed the windfall profit tax on domestically produced oil from zero to ₹6,400 per tonne and scrapped export duty on diesel. The tax rates are reviewed every fortnight based on the average oil prices in the previous two weeks. Starting July 1, 2022, India imposed the windfall profit tax, joining a growing number of nations that tax super normal profits of energy companies. While duties were slapped on the export of petrol, diesel and jet fuel (ATF), a Special Additional Excise Duty (SAED) was levied on locally produced crude oil. New Delhi had then introduced export duties of Rs 6 per litre on petrol and ATF and Rs 13 a litre on diesel. Windfall profit tax is calculated by taking away any price that producers are getting above a threshold. The levy was expected to compensate for the reduction in the excise duty on petrol and diesel to provide relief to consumers. But the reduction in the windfall cess from the initial levels is expected to reduce the realisation for the government. Private refiners Reliance Industries Ltd and Rosneft-based Nayara Energy are the primary exporters of fuels like diesel and ATF. The windfall levy on domestic crude aims producers such as state-run Oil and Natural Gas Corporation (ONGC) and Vedanta Ltd.