Commodity

Vitol says OPEC+ will have to keep output cuts as new supply hits market

Highlights

Chinese demand led by petrochemicals

Jet demand set to beat pre-COVID levels

Red Sea attacks not Black Swan for oil

OPEC+ will have to maintain production cuts for this year as new supply continues to reach the market from countries such as the US, Guyana, Venezuela and Brazil, top commodities trader Vitol’s head of Asia Mike Muller told a webinar Jan. 10.

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Even with a “healthy kick” in demand estimated to grow 1.7 million-1.8 million b/d this year, OPEC+ will only take a share that is “not material,” Muller said on the Gulf Intelligence all-day webinar. “There’s space for OPEC+ to take some extra share of production but it’s not material. It still requires them to keep their policies pretty much in line with what we’ve seen for the last couple of years.”

OPEC+ member countries have implemented crude production quotas since signing a cooperation deal in 2016. Quota volumes have fluctuated in response to global events affecting supply and demand as well as price volatility.

Brent oil prices have remained near $75-$79/b in recent weeks with a “relatively balanced market and inventories on the low end of the range,” very much caused by OPEC+ policy, Muller said. While in the Western Hemisphere peak oil demand is accepted, in Asia oil consumption is still growing, he added.

Black Swan

The Red Sea shipping attacks have not turned out to be a Black Swan for oil because shipping and oil prices haven’t materially been disrupted, he said. COVID-19 and the Russia-Ukraine war were Black Swan events because they did considerably affect oil, natural gas and power prices.

Platts, part of S&P Global Commodity Insights, assessed Dated Brent 4.1% higher at $78.91/b on Jan. 9 after starting the year at $75.70/b.

The Red Sea attacks were “very much newsworthy, they’re very important, and some carry great dangers, but things like the joint military action to prevent missiles from Yemen hitting merchant fleet coming through the Bab al Mandab have not served to materially disrupt shipping routes and have not served to materially disrupt oil prices,” Muller said.

More oil is being produced including in the US, Venezuela and the Kurdish region of northern Iraq, which has diverted crude to southern ports and to domestic refineries after being blocked for export out of Turkey, Muller said. While Libyan supplies have been disrupted by protests, sanctioned oil from Iran and Russia is still coming out in “decent quantities” while the US, Brazil, Canada and Guyana are all expanding output, he said.

The US production growth of 1 million b/d last year to 13.3 million b/d will probably slow, with output hitting 13.5 million b/d or 13.6 million b/d in a year, he said. “We have oil coming from everywhere.”

On the demand side, China’s oil consumption is largely being driven by petrochemicals while demand growth in India is more due to diesel, he said.

China’s government recently forecast a near 10% increase in flights for the upcoming Chinese New Year than before COVID-19, boosting jet fuel demand, he said. Muller said that when he went on holiday to the Swiss Alps, shop owners and restaurant operators told him they had never seen so many mainland Chinese tourists.

“If you have 30 million to 35 million Chinese joining the spending-saving middle classes, even if only a fraction of them jump on planes for the first time in their life, I think we’re going to see jet demand close that pre-COVID” level to before the pandemic hit, which would be the last bit of the oil demand puzzle to return to pre-COVID levels, he said. In November, air traffic rose almost 30% from a year earlier and was 99.1% of the November 2019 level before COVID, the International Air Transport Association said in a Jan. 10 statement.



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