OPEC+ Stands Firm As Global Oil Demand Teeters
Last week, OPEC+ decided to keep current oil production cuts in effect until the end of the year. The announcement was anything but surprising, and yet crude oil prices fell substantially, sparking suggestions that the OPEC+ cuts may already be activating what many call the cure for high oil prices, which is even higher prices. But there is a possibility that oil has higher to go still before it begins affecting demand. The question, as always, is just how high. The answer: perhaps a bit higher. India’s oil minister this week warned about unintended consequences from the OPEC+ cuts, saying it was the right of the OPEC+ producers to decide how much oil they would pump, but they should not be “unmindful of the consequences.” “And it can become a self-fulfilling prophecy, that the demand will drop because people don’t have the capacity to sustain it,” Hardeep Singh Puri added. According to Bloomberg’s Julian Lee, demand destruction is already underway. In the United States, gasoline consumption this driving season was 600,000 bpd below the average for 2019, the last pre-pandemic year with what is assumed to be normal demand. In addition, the latest EIA inventory report showed a substantial build in gasoline inventories, reinforcing a perception of lukewarm demand for fuels. Unsurprisingly, that build was one of the factors that weighed on prices this week. Yet while demand may weaken in the U.S., it is rising in other parts of the world. China, India, and Brazil, Lee notes, are all witnessing rising oil demand. Only, according to him, this growth needs to be stronger to offset the declines in demand elsewhere. This, however, would depend on the causes of demand destruction. And when we talk about U.S. demand, it was not prices that destroyed demand—oil was well below $90 per barrel during summer driving season. It could have been inflation, which remains elevated despite consistently high consumer spending. It could have been just one of those years. Meanwhile, oil demand in China is “booming”. “China’s demand for oil has been supported by record internal mobility, as indicated by robust congestion and domestic flight data,” Goldman Sachs commodity analysts recently said, noting the country’s booming demand for copper, driven by the low-carbon energy industries. India’s oil demand is also quite robust, despite the government’s concerns about prices, prompted by the fact that the country relies on imports for over 80% of its oil consumption. Despite his warnings about prices, India’s oil minister this week said the country “will manage” even if oil tops $100 per barrel. This seems to be where most observers see oil heading anyway. The latest to join the $100-per-barrel club was Norway’s Equinor, whose chief economist predicted that “I wouldn’t exclude that we can have prices reaching $100 a barrel,” but added that “that wouldn’t be because OPEC would like it to reach there. I don’t think they are aiming for that price.” Indeed, Eirik Waerness made an excellent point that others have made in recent days, too. OPEC+ as a whole or Saudi Arabia and Russia are not interested in watching oil prices soar sky-high. They are aware of the nature of the cure for high oil prices. So, as before, what they are doing is a fine balancing act that can keep prices high enough for producers but without killing demand, at least not too much of it. This is the key issue at stake: can the global economy keep chugging along even as oil rises close to $100 or even above it, or will there be a fallout that would, ultimately, destroy a lot more demand for oil? For now, it seems the economy keeps chugging along, accompanied by persistent concerns about interest rates, recession, and consumer spending. Meanwhile, forecasts of peak oil demand continue to come in, the latest from Rystad Energy. The Norwegian energy consultancy served a surprise this week by forecasting that oil prices are about to drop sharply thanks to ample supply and a peak in oil demand growth. This forecast goes counter to observations made by Equinor’s chief economist, who noted that tight production capacity globally was part of the reason why oil may soon top $100 per barrel. It also goes counter to what OPEC has been warning about for years now: underinvestment in new production that would ultimately compromise the global supply situation. For now, it appears the market is reasonably well supplied despite the Saudi and Russian cuts. But the balance appears to be delicate, with a deficit around the corner, according to most analysts. Once that is official, it will become clear just how elastic oil demand has become in the past couple of years or, alternatively, how inelastic it continues to be. And that might settle the debate about peak oil demand, at least for a little while.
Crude supply and inflation risk for India if war spreads
Senior Economists are in a wait and watch mode as to the impact of Israel – Hamas war on the Indian economy while agreeing there may be a crude oil supply challenge if the war spreads across West Asia. They said it is a bit early to comment on the impact as the situation has to be monitored. “In the worst case, there is also a likelihood of the conflict spreading across West Asia and involving several nations. That may lead to further supply challenges in crude oil where supply cuts by OPEC+ (Organisation of Petroleum Exporting Countries and other oil producing countries) have already led to a rise in global prices,” Suman Chowdhury, the Chief Economist and Head of Research, Acuite Ratings & Research Ltd told IANS. Chowdhury said with the rise in geo-political conflict, the global economy and trade may face further slowdown with a resurgence of inflation risks and higher volatility in the global markets which in turn can have an adverse effect on the rupee. “However, the direct impact of the conflict is going to be limited as Israel’s trade with India is a little over $10 billion with exports to Israel at $8.5 billion and imports at $2.3 billion in FY23,” Chowdhury said. On his part Madan Sabnavis, Chief Economist, Bank of Baroda told IANS: “The economic impact will be seen through oil price first followed by currency.” On Reserve Bankof India’s (RBI) likely action, Chowdhury said it would only watch the evolving scenario and is unlikely to take any action at this point in time. “As RBI gets more watchful, bond yields will stay high. Inflation impact will be seen on the Wholesale Price Index and not Consumer Price Index. As retail fuel prices will not be changed, higher crude prices will show on the oil marketing companies or fiscal if the government absorbs the same,” Sabnavis said. “However, it will (RBI) endeavour to maintain the system liquidity on a tighter side through tools like OMO (open market operations) sales which may have an impact on bond yields,” Chowdhury said. “Indian government may also take mitigating steps to cool down the prices of essential commodities in case the conflict expands to a full fledged war in West Asia and new supply bottlenecks emerge,” Chowdhury added. On the other hand the gold prices are expected to go up dueto the war.
Higher Fuel Prices Due To VAT Charged By States
Union petroleum minister Hardeep Singh Puri on Saturday said that though fuel prices were high in Madhya Pradesh, in some other states, petrol/diesel prices were higher as it all depended on value-added-tax (VAT) being charged by the states. He was replying to a question on high fuel prices in the state on the sidelines of a function in Indore. The price of petrol is close to Rs 110/litre in MP. “In letters to MPs, I have mentioned about international prices of fuel as in last two years of representative period, North Asia and countries adjacent to India have witnessed 60-70 percent rise in petrol and diesel rates. Petrol is being sold at Rs 330/litre in Pakistan while in our country due to decisions taken by PM Narendra Modi, it’s rate has reduced by 5 percent compared to two years ago,” he said. Puri said that in the same period, the rate of diesel reduced by 0.2perent. “It happened due to Modiji reducing central excise duty while some BJP-ruled states decreased VAT. Some states however could not do that,” he said. The minister said that in West Bengal, petrol price was probably around Rs 111/litre while it was Rs 96/97 per litre in some BJP-ruled states.
Call for fossil fuel phase-out on global stocktake agenda: UN report
According to the UNFCCC report, possible elements of the global stocktake outcome could include a call to parties on phase-out of fossil fuels, support global commitment to accelerate the phase-out of unabated fossil fuels, and efforts to phase out inefficient fuel subsidies by 2025, supported by enabling environments and upscaling investments in renewable energy. The International Energy Agency IEA said in September that global demand for oil, natural gas and coal is likely to peak by 2030. Calls to phase out unabated fossil fuels, reform subsidies on it and triple global renewable energy capacity may find their way into the outcome of the first-ever global stocktake, a periodic assessment of collective efforts to achieve the Paris Agreement goals. The United Nations Framework Convention on Climate Change (UNFCCC) recently released a report summarising submissions made by countries and non-party stakeholders regarding the political response to the global stocktake. ”They will inform negotiations but there’s no guarantee any particular element will make it into the final text. With that said, fossil fuel phase-out is prominently featured in this long list of possible decision elements,” Natalie Jones, a policy advisor at climate policy think tank International Institute for Sustainable Development (IISD), said. According to the UNFCCC report, possible elements of the global stocktake outcome could include a call to parties on ”phase-out of fossil fuels, support global commitment to accelerate the phase-out of unabated fossil fuels, and efforts to phase out inefficient fuel subsidies by 2025, supported by enabling environments and upscaling investments in renewable energy”. The International Energy Agency (IEA) said in September that global demand for oil, natural gas and coal is likely to peak by 2030. The IEA termed it an encouraging development but ”not nearly enough” to limit the rise in global average temperatures to 1.5 degrees Celsius. Countries promised to phase out ”inefficient” fossil fuel subsidies at COP26 in Glasgow in 2021 and COP27 in Sharm El Sheikh in 2022, but they hit record highs in 2022. A report that came ahead of the G20 Leaders’ Summit in New Delhi in September said countries in the bloc allocated a staggering USD 1.4 trillion of public funds to support fossil fuels in 2022, aiming to counter the impact of their soaring prices due to the Ukraine war and strengthen energy reserves.
India, Saudi Arabia sign MoU for green hydrogen supply chain, power grid interconnection
Nearly a month after signing the energy cooperation pact which spoke about power grid interconnectivity, India and Saudi Arabia have signed a memorandum of understanding (MoU) for green hydrogen supply chain and power grid interconnection. The MoU was signed on Sunday in Riyadh, Saudi Arabia by union minister for power and new & renewable energy RK Singh and the minister of energy, Saudi Arabia, Abdulaziz bin Salman Al-Saud on the sidelines of the MENA Climate Week 2023. “This MoU aims to establish a general framework for cooperation between the two countries in the field of electrical interconnection; exchange of electricity during peak times and emergencies; co-development of projects; co-production of green/clean hydrogen and renewable energy; and also establishing secure, reliable and resilient supply chains of materials used in green/clean hydrogen and the renewable energy sector,” said a statement from the ministry of power.