Evolving events in the global oil market have been attracting attention similar to a celluloid star’s much-awaited performance. Will the new ‘release’ be a hit or bomb?
Production cuts, shifting alliances, high-voltage policy decisions, and choosing Vienna (famously host to never-ending spy games) for closed-door meetings while keeping the fourth estate oblivious to the happenings within have all been tried and tested!
With overt dependence on oil income to facilitate economic goals, OPEC+ members feel the pinch. Regardless of their geographical presence, almost the entire oil-producing fraternity has reported much lower revenues in the second quarter of this year with declining oil prices. Yet it would be prudent not to compare 2022 numbers as it was a year of “delinquent exuberance”—courtesy Ukraine war. A higher share of US crude landing in global markets kept the rising prices reined in consequent to production cuts at OPEC+ sources.
With a protracted stalemate on the Iraq-Turkey pipeline, production outages in Nigeria and Libya, the escalating geopolitical unrest in Africa, and suspected reduced drilling activity at aging refineries in the US, a global supply crunch is imminent.
Continued sanctions on the Kremlin have taken a toll on the smooth conveyance of oil supplies. The European Union is critical of re-routed Russian finished oil products finding their way into its territory. Interestingly, some members continue to patronize Russian oil at domestic production facilities.
With 65% of its oil imports from Russia, Hungary has sought another one-year extension of an exemption from EU sanctions, thereby allowing Budapest to continue to export products refined from the Russian Urals at MOL Hungarian Oil & Gas-owned Danube refinery. Slovakia’s Slovnaft refinery, a subsidiary of MOL, meets 95% of the Central European country’s oil requirement from imports of Russian crude. Bulgaria successfully obtained exemption from Brussels for Russian oil imports that land at its sole refinery, Neftochim Burgas, owned by Lukoil, Russia’s second-largest oil producer. Under a special understanding, the EU allowed Sofia to export diesel products converted from Russian crude to Ukraine!
With Russian Gas out of the ambit of sanctions, Austria continues its high dependence on imports from Gazprom, with no signs of a reduction in supply dependence. Such ‘arrangements’ seldom provide lasting redemption from ‘energy pains’.
High diplomacy and parleys are the way forward to defuse the confrontation. Talks at Copenhagen earlier in June were inconclusive. The highly ambitious plans of Ukraine failed to convince European members. A graded increase in sanctions on Russia is something the Western bloc is reluctant to concede. A lot is at play in international diplomacy which will determine the fate of oil prices.
India’s neutral deportment to sanctions on Moscow is evident as imports of Russian oil touched new highs in June. With Indian Oil’s stakeholding in a subsidiary of Rosneft (Russia’s State oil company), the appointment of an Indian director on the board of Rosneft in June this year shall facilitate stable and long-term trade understanding.
India is not unique in forging such corporate ties; the endorsers of sanctions have fostered closer relationships. Former Austrian Chancellor W Schuessel was on the board of Lukoil until last year. Karin Kneissl, Austria’s former Minister of Foreign Affairs, critical of the EU, well conversant in Arabic and an expert on the energy market and the Middle East, created quite a flutter when she waltzed with President Vladimir Putin while he attended her wedding in August 2018. She later was a member of the board at Rosneft until 2022. Set to head GORKI (Geopolitical Observatory for Russia’s Key Issues, a think tank established as part of St Petersburg State University), she would focus on West Asia studies and energy issues.
Saudi Arabia, keen to debut on the stage of world diplomacy, hosted the recent meet at Jeddah, initiating negotiations in the Russia-Ukraine conflict and brokering peace. This was Ukraine’s opportunity to ‘galvanise’ the Global South. Among the invitees, India plays a strategic role as the third-largest consumer and a fast-developing economy. New Delhi’s approach to the conflict has been ‘inclusive’, advocating dialogue and diplomacy. China remains the single-largest consumer of oil from Russia and Saudi Arabia as of last quarter. Earlier in the year, China facilitated the easing of a seven-year diplomatic impasse between Iran and Saudi Arabia. Beijing’s attendance at Jeddah is viewed as a game-changer as Moscow hints at seeking other BRICS members’ opinions, invoking optimism.
Saudi has expressed its intentions to continue with production cuts through September as Russia has indicated a reduction in oil exports. Brent crude currently trades at $86, the highest since April. Earlier this year, this column considered $75 to support a rebound surge eventuality. With a predicted all-time high demand, major financial analysts have upped their price estimates despite recessionary fears in China. A prominent multinational investment banking company has pegged it at $93 for mid-2024, which could happen much earlier.
The US Strategic Petroleum Reserve (SPR) is at a 40-year low. A replenishment is not too far in the future; when that happens, the prices are bound to kiss north. The declining North Sea output could exacerbate supply pains.
Wars never benefit anyone except the bullets that find targets. Combined initiatives for bringing peace in the Ukraine war would stabilise the energy market, especially with the green transition unfolding. The weaponisation of oil would be counterproductive. Broader interests need to accord precedence. Only then shall we usher in peace and fuel stability.
“The disunited mind is far from wise;
How can it meditate? How be at peace?
When you know no peace, how can you know joy?” —Bhagavad Gita
Ranjan Tandon is a senior markets specialist and author. He can be reached at ranjantandon@live.com.