Models of oil barrels and a pump jack are displayed in front of a stock graph in this illustration. - Reuters
THE pain of high global crude prices and tighter supply is the last thing major oil importers in Asia and elsewhere want at a time when many import-dependent economies are witnessing a fragile recovery after years of pandemic-hit growth.
But the unexpected production cuts announced by OPEC and its allies in early April have brought those fears to the forefront.
OPEC and its allies said they plan to make more than 1.6 million b/d of voluntary production cuts, with the bulk of the reductions starting in May and lasting until year end. Saudi Arabia and Russia will take the lead with reductions of 500,000 barrels each, followed by Iraq, the UAE and Kuwait.
This will constrict oil supply further, starting in May, in a preemptive move by OPEC+ to support prices that had fallen last month. The OPEC+ cut to oil output was no surprise fundamentally, but the way OPEC+ negotiated and announced the cut, and the timing of it, was unexpected.
The latest pledge to cut production brings the total volume of cuts by OPEC+ to 3.66 million b/d, a significant reduction for the oil market.
While the surprise OPEC+ production quota cuts have propped up oil prices in April, this has heightened concerns that supplies would tighten further in the second half of the year and complicate decisions for central bankers, especially after the recent global banking crisis.
It will also mean more competition among refiners in Asia – the biggest importing bloc for crude from OPEC+ -- especially as crude demand is expected to increase after the spring maintenance season.
It’s not over yet
The surprise cuts may not just alter trade flows but also put fragile diplomatic relations in the spotlight.
While the cuts should be sufficient to satisfy OPEC’s objectives but not so dramatic as to trigger a US SPR release, the political drama could intensify ahead of the June 4 OPEC+ meeting, potentially including anti-OPEC and Saudi proposals from the US Congress if the “voluntary” cuts are not reversed before the high-demand driving season in the US.
S&P Global Commodity Insights expects near-term Dated Brent crude prices to peak in 2023 at around $90/b in July-August. For the full year, Dated Brent prices are expected to average $85.50/b, before easing to average $84/b in 2024.
For Asia, the abrupt production cuts by OPEC and its allies may prompt a recalibration in buying strategies and trigger increased competition for crude from outside the supply bloc.
Although leading Asian buyers such as India and China may see a relatively smaller supply impact due to the relentless flows of Russian crude over the past year, what is more worrying for Asia overall is the anticipated surge in oil prices that could stoke inflation.
"Higher global oil prices feed through to inflation as consumers face higher energy costs and producers face higher input costs. The rise in oil prices during Q2 2022 was an important factor in driving inflation higher in Asia over the course of the year,” said S&P Global Ratings Asia-Pacific Economist Vishrut Rana.
Prior to the increases over the past month, global oil prices had been declining and contributing to some disinflation. With the recent gains, it is expected there would be some upward pressure on sequential consumer prices that would slow down the ongoing disinflation.
S&P Global now projects global oil demand to grow by 2.2 million b/d in 2023, marginally lower than last’s month forecast, followed by an additional gain of 1.9 million b/d in 2024.
Over 70% of the global oil demand addition in 2023 is expected to come from Asia, with China alone accounting for more than 55% of the regional demand growth.
Asia’s unending concern
Chinese buyers are also somewhat worried, as Asia’s biggest oil consumer is expected to see accelerated demand recovery. But in the short term, as China’s maintenance season starts, crude demand in Q2 would fall from the high level seen in Q1, slightly offsetting the bullish factors.
In India, refiners were not unduly worried about the supply outlook since discounts on Russian-origin crude oil are providing ample cushioning and somewhat offsetting the high insurance and freight costs associated with purchasing and shipping Russian crude oil.
With Urals crude from Russa having assay qualities similar to Middle Eastern oil grades and advantageous lower sulfur content compared with similar API Middle Eastern crudes, Indian refiners have swapped Middle Eastern crudes in favor of Urals for refinery processing.
For immediate needs, Asian refiners are convinced that their term Middle Eastern crude supplies will not drop drastically. But any uptick in outright benchmark oil prices and Middle Eastern crude spot premiums would once again hit Asian consumer confidence and fuel demand.
Asia so far has experienced only limited impact from the recent banking crisis, and the region’s oil demand is expected to rebound strongly in 2023, with China providing the push to regional growth as it reopens after pandemic lockdowns that continued until late last year.
S&P Global expects Asian oil demand to grow by 1.6 million b/d in 2023, up sharply from 350,000 b/d in 2022. The region is expected to account for nearly three-quarters of global oil demand growth in 2023, up from as little as 15% in 2022.
Whether high prices can temper the region's growth revival story is a factor that policy makers will be watching closely.
Sambit Mohanty is Asia Energy Analyst at S&P Global commodity Insights, leading coverage for Platts Oilgram News for the Asia-Pacific region. Sambit is based in Singapore and has more than 25 years of experience as a senior journalist and editor analyzing commodities and energy trends in the region. He holds a Master’s Degree in Applied Economics.
