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OPEC Plus output, US debt ceiling, Asia oil demand: Key triggers for global oil market

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The global oil market is likely to stay volatile in the coming week as the Organization of Petroleum Exporting Countries and its allies or OPEC+ is set to consider output levels on its June 4 meeting.

The market will take further cues from the upcoming meeting of the oil producing cartel even as conflicting messages from Russia and Saudi Arabia’s energy minister have kept oil prices on edge.

Also, price volatility is expected to remain high till the outcome of the US debt ceiling discussions, according to analysts. India, which relies on imports to meet more than 80 per cent of its energy needs, will be closely tracking the global oil market.

How has crude performed so far?

Oil benchmarks Brent crude and US West Texas Intermediate (WTI) are confined in the range $74-$78 and $69-$74 respectively. The current prices are fluctuating sideways on the backdrop of US debt crisis and its impact on the global economy. Some central banks across the globe, in their course to combat inflation, are now considering a pause in interest rate hikes as a potential end to tightening cycles.

However off late, the most significant rise in oil prices came last month when OPEC+, announced production cuts of around 1.16 million barrels per day (bpd) in a surprise announcement. The shock cut resulted prices to surge over 8 per cent to $83.95 a barrel – the highest rise in more than a year. The voluntary OPEC+ cuts started from the beginning of this month and will last until the end of the year.

The surprise move had temporarily added a wrinkle to central banks’ efforts to tame inflation, but OPEC+ defended its decision as being aimed at oil market ‘stability’. With the supply cut and demand recovery in China, oil prices may again surge to the levels of $100 per barrel, last seen in July 2022, according to analysts. In March, benchmark Brent crude fell to $72 per barrel, the lowest in 15 months, due to the collapse of major global banks including Silicon Valley Bank and Credit Suisse.

By putting the prospect of $100 a barrel oil back in view after it had dropped to $70, the decrease in production has invited potentially ominous signs of global inflation, adding to worries that higher prices could again compel central banks to resuscitate an aggressive monetary tightening cycle.
What will OPEC+ decide at its meeting?

After delivering a surprise blow in April, OPEC+, the group of 23 oil-producing nations including Saudi Arabia and Russia, is set to meet in Vienna to decide the global supply output. Analysts and investors have interpreted Saudi Arabia energy minister’s warning as a signal that OPEC+ could consider further output cuts, however, the conflicting messages from Russia and Saudi Arabia are currently weighing on market sentiments, ahead of the OPEC+ policy meeting.

Saudi’s Prince Abdulaziz bin Salman recently announced that he would inflict more pain on short sellers and told them to watch out just days before a planned OPEC+ meeting to decide on future oil policy.

“Speculators, like in any market they are there to stay, I keep advising them that they will be ouching, they did ouch in April, I don’t have to show my cards I’m not a poker player… but I would just tell them watch out,” he told the Qatar Economic Forum organised by Bloomberg.

Only a day after the Saudi energy minister warned market short-sellers, Russia’s deputy prime minister Alexander Novak played down the prospect and poured some cold water on expectations of another supply cut, saying he doesn’t expect new steps.

“I don’t think that there will be any new steps, because just a month ago certain decisions were made regarding the voluntary reduction of oil production by some countries…” Novak was quoted as saying by a Russia-based newspaper. Russian President Vladimir Putin also said that energy prices were approaching “economically justified” levels, also indicating there could be no immediate change to the group’s production policy.

The OPEC nations produce around 30 per cent of the world’s crude oil. Saudi Arabia is the largest oil producer within the cartel and also the world’s largest oil exporter, producing more than 10 million bpd. Together, OPEC+ nations produce about 40 per cent of all the world’s crude oil.

Analysts at Standard Chartered bank said in a note that short speculative positions are now as bearish as they were at the start of the pandemic in 2020. “We think the latest build-up in short positions significantly increases the probability of further production cuts when OPEC+ meets,” the analysts said.

How will US debt ceiling risk impact prices?

The risk premium in oil for the upcoming week will be purely focused on the outcome of the US debt ceiling as it is a major catalyst and will likely determine the market’s next directional move, according to analysts.

US President Joe Biden and Republican House Leader Kevin McCarthy are currently locked in negotiations on how to raise the debt limit — the maximum amount of debt the Treasury Department can borrow to fulfil its financial commitments. Analysts believe that the US debt ceiling gets approved at the last minute as the government cannot afford to default on its own debt as it remains one of the most secure markets for investors

The US defaulting on its debt could seriously affect energy markets but the chances of that happening are “exceedingly low”, according to S&P Global Commodity Insights. ”A default would take currency markets to places ‘the world’s not seen before’ and that would affect energy prices and trading as most of the crude oil is exchanged using the US dollar”, it added.

Last week, the dollar came off a two-month top against a basket of major peers as investors expect the Federal Reserve to keep rates unchanged at its June meeting. A softer greenback makes dollar-denominated commodities more attractive to investors. On the other hand, a stronger dollar makes dollar-denominated oil more expensive for holders of other currencies.

The global oil market also faces uncertainty from potential actions by the Group of Seven (G7) countries to further enforce price caps on Russian energy exports. In December 2022, the European Union (EU) and the G7 announced a price cap of $60 a barrel on global purchases of seaborne Russian crude. This was followed by caps on Russian petroleum exports in February 2023.

What’s happening in Asia?

India’s oil imports from Russia rose to a fresh record high in April, reducing the share of Middle Eastern and African grades to their lowest level in at least 22 years. Asia’s third-largest economy imported 1.9 million bpd of Russian oil in April, about 4.4 per cent higher than March, which accounts for about two-fifths of the nation’s overall purchases.

Russia remained the top oil supplier to India for the sixth-straight month in April, followed by Iraq and Saudi Arabia. This narrowed the share of the Middle Eastern grades, which traditionally accounted for the bulk of total oil imports, to about 44 per cent and African oil to 3.4 per cent last month, according to Reuters data.

Most recently, Chris Wood of global investment banking firm Jefferies wrote in his GREED & fear newsletter that India’s “increased national self-confidence” has been manifested on the world stage in the past year and more in regards to its purchasing of cheap Russian oil.

On the other hand, top oil consumer China is expected to witness a fresh COVID wave towards the end of June with as many as 65 million cases per weak upon the spread of the latest XBB Omicron variant, after the country’s economic growth slowed down in the first quarter of current fiscal.

Analysts reckon that China’s demand is expected to pick up widely in the second half of the year, but the softer demand in near-term is expected to swell at a slower rate.

China and India, two of the world’s top three importers, had become Russia’s biggest customers after the West imposed sanctions on Russian oil post the outbreak of the Ukraine war. Reduced buying by both the Asian giants would force Russia to chase other customers.

What’s next?

The International Energy Agency upgraded its forecast for 2023 oil demand by 200,000 bpd to 102 million bpd, adding that the oil market faces a supply crunch in the second half of the year.

“The current market pessimism, however, stands in stark contrast to the tighter market balances we anticipate in the second half of the year, when demand is expected to eclipse supply by almost 2 million bpd,” said the said the Paris-based agency gathering of the 31 mostly industrialised countries and much of the EU.

In addition, OPEC’s global oil demand forecast for 2023 was held steady for the third month in May, with the producer group citing the potential Chinese growth to be offset by downside economic risks elsewhere such as the US debt ceiling. The world oil demand in 2023 will rise by 2.33 million bpd, or 2.3 per cent, OPEC said in its monthly report.

After surging to nearly $140 a barrel last year, Brent, the benchmark for two thirds of the world’s oil, is currently trading below $80 a barrel — a level deemed comfortable for most oil-buying nations, according to S&P Global Commodity Insights.

S&P Global expects oil prices to stay in the ‘mid-to-high 80s’ for the remainder of this year into next. The firm is also bullish on prices in the short to medium term as limited spare production capacity in the market makes crude price rises more likely.

According to Bank of America, oil prices will return to above $80 per barrel in the second half of this year and could continue rising toward $90 due to a deepening supply deficit. Analysts in the latest monthly Reuters survey also see prices rising toward $90 per barrel by the end of this year, driven by Chinese demand and a tightening market following OPEC+’s latest production cuts.

Source: Livemint

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