The Saudi-Iran-Yemen tensions seem to have failed to be able to create a permanent risk premium to international crude oil prices. While, there were contrasting reports as regards the extent of loss and the likelihood of more attacks, there was a consensus, even amongst the traditionally conservative market readers, that the latest Middle East tensions do warrant a premium of 3-5 per barrel.
But as it has so often happened with oil market, the demand forecast and supply realities eventually lead the way, in terms of price determination. As the bull rally was short lived after the Saudi episode, and the premium evaporated in less than a week, many pinned hopes that the Opec may come out with a different strategy, which could spell the beginning of the end to the ongoing production cut deal, along with Russia.
It never arrived. In fact, Opec has come up with the much awaited World Oil Outlook report, confirming earlier fears that like most other observers, Opec sees the global oil demand growth falling from earlier estimates. While the oil demand is still expected to grow in the next five years, the pace of growth is decisively lower to just 104.8 million barrels per day by 2024. Just a year and a half ago, the big research houses were predicting oil demand at 110 mbpd by 2024.
The global economic slowdown is real, and whatever growth is seen coming, is expected to come mainly from Asian countries, where India is likely to lead the growth charts. The Opec members and Russia, in what is loosely termed as Opec Plus, expects the production to further lessen from already significantly reduced levels at present.
This implies that the oil market share is going towards non-Opec members, where the USA is expected to lead the way. Opec also sees immense room for the likes of Canada, Brazil and Norway – in the increased market share of the non-Opec oil suppliers. There are no hints from Opec that the bloc is even considering reviewing the production freeze arrangement. The oil inventories have been beefed up, as the UAE was the latest to announce fresh oil and gas reserves, further increasing long term inventory pile.
Till then, it is guess work at best. Meanwhile, Opec and Russia, have stated that there is no need to push the panic button yet, pointing at more than ample global commercial oil stocks, at the disposal of the two leading producers, the USA and Saudi Arabia. Should the stocks see drawing, the supply situation could be back to normal swifter than what it looks today. Although, the drawing from reserve stock normally carries a premium, but global stockpile today, is at a multi-decade high – and could only be seen as a step to bring the market close to equilibrium. Also, US shale players are never too far off, to sense the opportunity and pump in more, should the bull rally go any deeper.
Meanwhile, Islamabad should not mind the Opec report findings, as it offers a much needed breather for the government to continue its efforts to sustain the reduction in current account deficit. Should prices stay range bound; it will also help a great deal in arresting the price increase at home.
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