Supply Cuts Boost Oil Prices But Economic Concerns Limit Gains
A slew of bullish and bearish factors have battled for dominance in the oil market this year as OPEC+ efforts to tighten the market have run up against concerns about global economic growth. For most of the first half of this year, prices were trading in a relatively narrow range of $70-$80 per barrel until the extra Saudi production cuts on top of OPEC+ reductions lifted market sentiment and oil prices higher in July and August, and to a year-2023 peak of over $90 a barrel this week after Saudi Arabia and Russia extended their respective supply cuts into the end of the year. Oil prices haven’t shot up much, however, weighed down by persistent concerns about economic growth in the world’s two largest economies, the United States and China, and an already weak, barely-there growth in Europe. Uncertainty prevails and continues to keep oil prices in a narrow range, ironically leading to relatively stable oil prices, Reuters columnist Clyde Russell notes. True, the latest announcement of extensions of the supply cuts sent oil prices higher. But they only moved up to an $85-$90 per barrel trading range, and analysts are not racing to predict $100 oil in the near term. That’s because uncertainty is looming large over the global economy and oil demand growth. Bullish Factors The OPEC+ production cuts have tightened the market, especially the market for sour crude, as Middle Eastern exporters – the largest sour crude producers – hold off some shipments. Saudi Arabia, for example, is estimated to have seen its August crude oil exports plunge to the lowest since March 2021 as the Kingdom continues to slash production by 1 million barrels per day (bpd) to keep markets tight and push oil prices higher. The market is tight, and the latest announced cuts through the end of the year are likely to deepen the deficit in the fourth quarter, supporting oil prices, analysts say. “For now, tight market conditions are still on clear display through the elevated backwardation shown across the forward price curve, not least at the very front where prompt spreads in WTI and Brent both commanding a backwardation around 65 cents per barrel, up from close to flat around the time Saudi production cuts were implemented,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in a note on Wednesday. “While the upside in our opinion remains limited there is no doubt that the current production cuts will keep the oil market tight, thereby providing support for oil prices, but whether that support translate to stable or higher prices will depend on incoming macro-economic data, and with that the outlook for demand,” Hansen added. The latest cuts “leave the market with a deeper than expected deficit over the fourth quarter of 2023, which should continue to support prices,” ING strategists Warren Patterson and Ewa Manthey said. The bank, however, is “reluctant to revise higher our price forecasts on the back of this extension, as demand concerns continue to linger and Iranian supply is rising.” ING’s oil balance projection shows a small surplus in the first quarter of 2024, which should limit prices moving significantly higher. The bank continues to forecast that Brent Crude prices will average $92 a barrel over the fourth quarter of this year. “Looking further ahead, we would not rule out a further extension of these cuts (fully or partially) into early next year, given that our balance sheet shows that the oil market will be in a small surplus over the first quarter of next year. Any cuts will obviously depend on where oil is trading towards the end of the year and whether demand worries are still present,” ING strategists said. Bearish Factors Macroeconomic headwinds and demand worries, especially in China, have been ever-present since early this year when Chinese macroeconomic data showed a less-than-spectacular rebound after the reopening. In addition, higher interest rates in the U.S. compounded concerns about whether the Fed will pull off a ‘soft landing’ after more than a year and a half of interest rate hikes. The latest data suggest that the labor market is cooling, and the Fed could pause the hikes when they meet at the end of this month. But if the move higher in oil stokes inflation again, interest rates could be kept higher for longer, dampening economic growth and oil demand. China’s crude oil demand is currently strong, driven by stock building and demand from refineries, which are exporting more fuel amid weak domestic demand, Saxo Bank’s Hansen said. Higher oil prices added to slowing economies in China and Europe, and potentially in the U.S., “does not in our opinion support sharply higher prices,” he added. “We do not join the $100 per barrel camp but will not rule out a relatively short period where Brent could trade above $90.”
Diesel consumption declines for third month in a row in August; petrol usage up
India’s diesel consumption, the mainstay of the country’s transport sector, fell 3 per cent m-o-m to 6.7 million tonnes (mt) in August 2023 as rains, particularly in eastern India, impacted mobility. Lower demand from the farm sector to some extent also led to the decline. However, high-speed diesel (HSD) usage in the country was higher by 6 per cent y-o-y from 6.3 mt in August last year, data from the Petroleum Planning and Analysis Cell (PPAC) showed. On the other hand, petrol, or motor spirit (MS) consumption rose by 4 per cent m-o-m to 3.1 mt last month, while on an annual basis, the usage was almost flat at 3 mt. The higher consumption was majorly from the personal mobility segment as weekend personal travel and tourism witnessed a slight uptick and higher demand for cooling due to heat and humidity also contributed, albeit marginally, to the increase in usage. Interestingly, diesel consumption declined for the fourth consecutive month in a row in August, on the other hand, petrol consumption after hitting south for three consecutive months since May 2023, rose last month. POL usage up Overall, consumption of petroleum products (POL) rose by 2.5 per cent to 18.57 mt during August 2023. On an annual basis, the consumption rose by 6.5 per cent from 17.44 mt in August 2022. Following a usage trajectory similar to petrol, POL consumption also rose last month after declining consecutively every month since May 2023. POL consumption last month rose on the back of higher factory activity. The seasonally-adjusted S&P Global PMI showed a robust improvement in manufacturing sector conditions across India, as new orders and output increased at the quickest rates in nearly three years during August. Firms scale up Firms geared up to handle rising demand by scaling up buying levels and rebuilding their input stocks at the second-strongest pace in 18-and-a-half years of data collection. Demand strength was pivotal to August’s robust performance, spurring the fastest upturn in new orders since January 2021, it added. Despite rains, the consumption of Aviation Turbine Fuel (ATF) managed to grow by 2 per cent m-o-m and 14 per cent y-o-y to 6,76,000 tonnes, largely aided by international travel during the month. Monsoons are a lean period for the airlines. Analysts expect India’s petroleum products demand to rise during the October-December quarter aided by rising industrial activity and preparations for the festival season. ICICI Securities in a June 2023 report said that after the last three years (FY21, FY22 and FY23) of relative weakness, it expects Indian fuel consumption to steadily grow over the next 2 years. This is helped by softer product prices and prices of petrol and diesel being held at the same level in the last 13-14 months. Besides, stronger economic growth predicted for the Indian economy in the next 2-3 years and the potential pass through of the supernormal marketing margins being earned on retail fuels, can spur better pricing power for petrol and diesel.
Adani Total Gas to build 500-TPD CBG plant for Ahmedabad Municipal Corporation
Adani Total Gas has received a work order from Ahmedabad Municipal Corporation (AMC) to design, build, finance, and operate a 500-tonnes-per-day capacity Bio-CNG (CBG) plant, the company informed the regulatory exchanges on September 6. The plant will be operated by Adani Total Gas for a concession period of 20 years. The plant is based on PPP Model. It will come up at Pirana/Gyaspur, Ahmedabad. In its latest annual report, Adani Total Gas has announced its plan to invest Rs 180 billion to Rs 200 billion in the next eight to 10 years to expand infrastructure for retailing CNG to automobiles and piped gas to households and industries. The company retails CNG to vehicles and piped natural gas (PNG) to household kitchens across 124 districts in the country. Bio-CNG is an environmental friendly fuel and has very low emissons, so it is very important to build Bio-CNG plants.
GAIL India expects to source 20-25% of LNG on short-term or spot basis
GAIL (India) Ltd, the state-run natural gas distributor, expects to secure about 20% to 25% of its supply of liquefied natural gas (LNG) on a short-term or spot market basis, Reuters reported quoting a company official. The rest of the LNG will be via long-term contracts, GAIL’s marketing director, Sanjay Kumar said at the Gastech industry conference in Singapore on Thursday, as per the report. He added that the company would tap spot markets to meet seasonal demand or volatility, the report said. Meanwhile, in the quarter ended June 2023, GAIL (India) reported a decline of 45% in consolidated net profit at ₹17.93 billion as compared to ₹32.50 billion in the corresponding period last year. The state-run gas distributor’s revenue from operations in Q1FY24 fell 13% to ₹328.48 billion, compared to ₹379.42 billion in the year-ago period.
ADNOC Gas, PetroChina sign $550 million LNG deal
ADNOC Gas has announced an agreement, valued between $450 million and $550 million to supply Liquefied Natural Gas (LNG) to PetroChina, one of the leading oil and gas producers and distributors in China. This agreement, according to ADNOC, underscores its growing global presence, particularly in the East and South Asian markets. Competition for LNG has increased since Russia’s invasion of Ukraine last year, with Europe importing record volumes of the supercooled fuel to replace Moscow’s gas supplies. “Natural gas plays a crucial role as a transitional fuel, generating lower-carbon emissions compared to other fossil fuels, and ADNOC Gas is committed to ensuring reliable supply to its customers around the world,” the company noted in a press release. This agreement follows several recent international LNG sales agreements, including those with Japan Petroleum Exploration Co (JAPEX), TotalEnergies Gas and Power, and India Oil Corp (IOCL). ADNOC Gas continues to leverage opportunities from ADNOC’s integrated gas masterplan, which links every part of the gas value chain in the UAE, ensuring a sustainable and economic supply of natural gas to meet local and international demand.
GAIL to tap spot LNG markets to meet surge in power demand
GAIL (India) Ltd will tap spot liquefied natural gas (LNG) markets to address surging power demand, an executive at the state-run company said on Thursday, as the Indian government calls for more supplies to address an electricity crunch. Much of India’s domestic gas supply is already committed, Sanjay Kumar, marketing director at India’s top distributor of natural gas, said on the sidelines of the Gastech conference. “So if there is actually demand, we will buy,” Kumar said, declining to comment on volumes. “We have been servicing the demand for the last one month also. Demand is already there,” he said. Over half of India’s roughly 25 gigawatts (GW) of gas-fired power capacity is non-operational because of relatively high LNG prices. The share of gas-fired power in overall output has fallen from an average of over 3% in the last decade to less than 2% currently because of the high prices.