No, crude prices are not headed for $150 a barrel
Now that oil has hit $95 a barrel, analysts have started to forecast higher prices. Estimates go all the way up to $150 a barrel, as in the case of JP Morgan’s energy analysts. This is followed by sympathetic projections of the likely impact on India’s macro fundamentals. It’s time we put a lid on this line of punditry. Oil prices are not going to go crazy. The first reason is that US President Joe Biden trails his likely opponent Donald Trump by 10 percentage points in the run up to the 2024 election, according to a recent Washington Post-ABC poll. While the poll has been widely panned, there is every reason for President Biden to work a little harder to make himself more agreeable to the most important Joe in an election year – the average Joe. That means containing the price of gasoline at the filling station.
Rupee Rumble: India-Russia Oil Deals Remain in Currency Limbo
Oil transactions between India and Russia are not currently being conducted in rupees because negotiations are continuing. This was stated by Pankaj Jain, the Secretary of the Ministry of Petroleum and Natural Gas of India, during discussions at the ADIPEC oil and gas exhibition. He said that This topic is now being discussed between the two nations; the negotiations have not yet been completed. In response to a question from TASS on whether or not Indian currency (in the form of rupees) is being used to purchase oil from Russia, he stated that this is not the case. Jain further mentioned that India and Russia settle their oil deliveries with other currencies. However, he wanted to refrain from commenting on the amount of oil that India wants to buy from Russia in 2023 and stated that it is impossible to forecast how much oil India will buy because he does not buy oil. The spokesman of the Indian Ministry of Petroleum mentioned that the purchases were made by companies based in India. The information that huge sums of Indian rupees had been gathered in Russia due to India’s payment for Russian oil purchases in rupees was disproved in September by Pavan Kapoor, India’s Ambassador to Russia. He noted that this situation is explained by a trade imbalance between the two countries. Earlier, the Russian Ministry of Energy refuted the allegations made by economist Mikhail Zadornov, who stated that the rupees stored in accounts may be one of the causes of the ruble’s depreciation. The Russian Ministry of Energy said that the rupees held in accounts are not one of the reasons for the depreciation of the ruble. Because oil companies repatriate a significant portion of their foreign currency revenue, the Ministry of Energy informed TASS that the opinion that problems with rupee conversion are causing the weakening of the ruble’s exchange rate does not reflect the actual situation. Any delays are not systemic, according to the Ministry of Energy’s statement.
September diesel sales in India down 3%, petrol up 5.4%
Diesel sales in India fell 3 per cent in September as a receding monsoon continued to dampen demand and slowed industrial activity in some parts of the country, preliminary data of state-owned firms showed. While diesel sales by three state-owned fuel retailers fell year-on-year, petrol sales rose in September. Consumption of diesel, the most consumed fuel in the country — accounting for about two-fifths of the demand, fell to 5.81 million tonnes in September from 5.99 million tonnes demand in the same period a year ago. Demand dipped by over 5 per cent in the first half of September, and consumption picked up in the second half as rains receded. Month-on-month sales were up 2.5 per cent when compared to 5.67 million tonnes of diesel consumed in August. Lingering monsoon Diesel sales typically fall in monsoon months as rains lower demand in the agriculture sector, which uses the fuel for irrigation, harvesting and transportation. Also, rains slow vehicular movements. Consumption of diesel had soared 6.7 per cent and 9.3 per cent in April and May, respectively, as agriculture demand picked up and cars yanked up air-conditioning to beat the summer heat. It started to taper in the second half of June after the monsoon set in. Petrol sales were up 5.4 per cent to 2.8 million tonnes in September when compared to the same period last year. Consumption growth was almost flat in August. Sales in September were up 5.6 per cent month-on-month, the data showed. Strong economic activity Macroeconomic data suggests a broad-based expansion across all sub-sectors of the economy, with the services sector continuing to post robust growth across financial, real estate and government services. India’s economy has demonstrated robust resilience and is likely to have surpassed the performance of most major economies during the first half of 2023. Industry sources said with steady and healthy economic activity and the ongoing air travel recovery, India’s oil demand is projected to rise in the remainder of the year. Suppliers group OPEC sees India’s oil demand expanding on average by 2,20,000 barrels per day on the back of vigorous economic growth. Consumption of petrol during September was 19.3 per cent more than in the COVID-marred September 2021 and 30 per cent more than in pre-pandemic September 2019. Diesel consumption was up 19 per cent over September 2021 and 11.5 per cent compared to September 2019. With the continuing rise in passenger traffic at airports, jet fuel (ATF) demand rose 7.5 per cent to 5,96,500 tonnes during September against the same period last year.
The Geopolitical Forces Driving Today’s Oil Market
There are three key determinants of how high oil prices will go from here. First, whether it is in the financial interests of the key players who have been pushing them higher to keep doing so. Second, whether it is in their geopolitical interests to keep doing so. And third, what other oil market players negatively affected by rising oil prices can do to bring them lower again. The first determinant is that it remains absolutely in the financial interests of Saudi Arabia, Russia, and the rest of the OPEC+ cartel to keep oil prices going up – the higher the better. Over and above the nonsense about balancing oil markets, the real reason that Saudi Arabia has for driving oil prices higher is simply that it needs the money. The money from oil (and from its hydrocarbons sector more widely) is the foundation stone of all funding for the Saudi state and for the ongoing power of the Royal Family, as analyzed in full in my new book on the new global oil market order. It is used to effectively subsidize large swathes of the economy, without which employment would fall, taxes would rise, and the social benefits of housing, education, and health, would cease to function properly. This money is funneled not just directly into subsidies for these areas but also into major projects that have nothing to do with the oil sector from which the funds emanated. Examples of such projects include developing a US$5 billion ship repair and building complex on the East Coast, creating the King Abdullah University of Science and Technology, and the US$500 billion Neom project. Any failure to keep delivering on these massive socio-economic projects funded almost entirely from hydrocarbon revenues would dramatically increase the likelihood of the removal of the Royal Family, and they know it. Consequently, the official fiscal breakeven oil price of US$78 per barrel (pb) of Brent for Saudi Arabia is irrelevant. In practice – as the fiscal breakeven oil price is the minimum price per barrel that an oil-exporting country needs to meet its expected spending needs while balancing its official budget – its true fiscal breakeven oil price has no set limit. The same considerations apply to virtually all other members of the OPEC grouping of OPEC+. For the key player in the ‘+’ part of OPEC+, Russia, the same irrelevance applies to the official fiscal breakeven price. For around 20 years, it had a fiscal breakeven oil price of around US$40 pb. Following its invasion of Ukraine on 24 February 2022, this jumped to an official US$115 pb. Unofficially, though, as wars do not adhere to easily quantifiable and strictly adhered to budgets, the fiscal breakeven oil price is whatever President Vladimir Putin thinks it should be at any given moment. An additional element at play in Russia’s support for ever-higher oil prices is that it undercuts the oil prices offered by Saudi Arabia and other OPEC+ members with direct deals done with major buyers, such as China – so, again, the higher the oil price the better for it. Russia began to determinedly push Saudi Arabia and OPEC+ members into driving oil prices higher from the moment that a general US$60 pb oil price cap on Russian oil was introduced in December 2022. The higher OPEC+ members push the oil price, the higher Russia can secretly sell its oil above that US$60 pb cap. On the second determinant, though, there is a key geopolitical reason that such oil price rises cannot keep going on forever, and this is China – the core geopolitical ally of both Saudi Arabia and Russia. Part of the reason why China will not continue to support oil price rises from OPEC+ is that it is a net importer of oil, gas, and petrochemicals, so higher prices negatively affect its economy too. Even now, its recovery from three years of over-tightly managed Covid is in question, and continued rises in energy prices will not help this. Certainly, it enjoys deeply discounted oil from Russia and from several other OPEC+ members, including Iran, Iraq, and even Saudi Arabia from time to time, but there is a limit on how much more prices can be increased without China really beginning to feel the economic pinch, even with discounts applied. China, though, will also feel enormous economic fallout from higher energy prices indirectly through the effect they have on the economies of the West – and these remain its key export bloc. The U.S., even with elements of the ongoing Trade War still in place, accounts for over 16 percent of China’s export revenues on its own. According to a senior source in the European Union’s (E.U.) energy security complex, and another source in a similar role in the U.S., the economic damage to China – directly through its own energy imports and indirectly through damage to the economies of its key export markets in the West – would dangerously increase if the Brent oil price remained over US$90-95 pb beyond the end of this year. The third key determinant is that other oil market players do have options open to them to bring oil prices down again. Over and above the plans in place to bring Iran’s 3 million barrels per day (bpd) back into the oil market through a new version of the ‘nuclear deal’, other supply increases are also in the offing. According to the U.S. Energy Information Administration (EIA), combined non-OPEC producers are expected to increase production by 2.1 million bpd in 2023 and 1.2 million bpd in 2024. The agency expects U.S. oil production to exceed 12.9 million bpd of monthly crude production for the first time in late 2023 and expects output growth to continue into 2024 to put U.S. crude production at 13.09 million bpd. Other major non-OPEC increases are set to come from Brazil, Canada, Guyana, and Norway, according to the agency. The ongoing recalibration of demand towards gas is also likely to reduce