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Crude oil: New super cycle or continued price moderation? (Part 2)

This is the second part of the crude oil discussion with energy markets veteran Vandana Hari. Tony Nash asked if the political tensions in the Middle East will affect oil prices in this environment, and how soon can we see the effect in oil prices if the Iran agreement is made? She also discussed her views on the Texas shale industry and when can we see a bounce back, or if we’ll ever see one.

 

The first part of this discussion can be found here.

 

Vandana Hari is based in Singapore. She runs Vanda Insights and have been looking at the oil markets for about 25 years now. She launched Vanda Insights about five years ago. The company provides timely, credible, and succinct global oil markets, macro analysis, mostly through published reports.

 

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This QuickHit episode was recorded on May 19, 2021.

 

The views and opinions expressed in this Crude oil: New super cycle or continued price moderation? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

VH: And then, of course, we have Iranian oil and we could talk about that separately. So there’s plenty of supply.

 

TN: Let’s move there. So let’s talk a little bit about the Middle East with. First of all, with the political risk around Israel Palestine. Is that really a factor? Does that really impact oil prices the way it would have maybe 20, 30 years ago?

 

VH: OK, so with regard to the Israeli-Palestinian conflict that we’ve seen flare up in recent days, the short answer is no. Oil, it’s not even a blip on the radar of the oil complex. Now, obviously that’s because those two countries are neither major producers or consumers of oil. It is also not affecting shipping, the kind of fear that was in the markets, for instance, when ships were attacked in the Strait of Hormuz or the Red Sea.

 

But having said that, generally the oil market is keeping an eye on how that region, the tensions have been escalating. The Iranian and Arab tensions have been escalating. We have seen more attacks over the past few months. It seems to have died down a little bit recently, but more attacks from by the Houthi rebels just managing to miss white facilities in Saudi Arabia. So, yes, it is an area of concern. But somehow the oil market, maybe because there is enough oil available against demand, but the oil market has sort of almost gotten into this pattern of, that’s a knee jerk reaction. Every time, it looks like a supply might be affected from that region. But the oil complex has just been generally reluctant to price in on a sustained basis of geopolitical fear premium.

 

TN: Yeah, I can see that. That’s very evident. With the JCPOA, with the Iran agreement, how much of a factor would that be to supplies and over what timeframe would it be a factor? Would it be an immediate factor? Would it be something in six months time from if an agreement is made?

 

VH: We know the indirect talks that have been going on between the US and Iranians the past few weeks, and then there’s been a bit of confusing signals as well in terms of news emanating earlier this week. We had a Russian diplomat say that, oh, it’s on the verge of a breakthrough and then retracted so it doesn’t help the oil market of anybody as opposed to have that adding to the confusion. The oil market has made its calculations.

 

First of all, Iranian oil production as well as exports have been edging up. That’s a fact. Now, obviously, there’s no clearly transparent data, but there’s plenty of ship tracking companies, all of which have very clear evidence that there’s more oil going into China.

 

So to some extent, you could argue that crude prices today have factored in a little bit of extra Iranian oil coming back into the market. Just to remind our viewers that it never went down to zero. There was always Iranian in oil flowing into and we’ll not go into the details of that. But basically it’s sort of bypassing the US sanctions. So the question now is how much more Iranian oil can come into the market and when it could come into the market?

 

And I would add a third point to that is that what will OPEC+ do to that if it ends up pressuring prices? So how much more oil could come into the market? An estimated 1.2 million barrels per day additional oil could come if the sanctions are removed. When it could come back into the market? I’m no more privy to what’s going on behind closed doors in the discussions than the next person. But my personal feeling from reading what’s coming out of these talks is that it’s a very complex set of issues.

 

There’s a lot of politics going on when people come out and say, oh, we’ve made progress and so on. But it’s a complex web. It’s multilayered. I personally don’t expect sanctions to be removed before next month’s Iranian elections. So sometime this year, yes. But not right away.

 

And here’s the point I would make as well, is that I don’t think OPEC-non OPEC alliance will sit on their hands and see, especially if crude starts spiraling downwards with the Iranian oil more than Iranian oil coming back into the market. I think they will make adjustments accordingly. If the market can absorb it without a big hit to oil prices, well then good, you know, which is what was the case with Libya last year. But if it can’t, I think they’ll just redistribute that sort of cut back a little bit more or taper less basically. So either way, I don’t see that putting a huge downward pressure on crude.

 

TN: I’m in Texas and so we haven’t really seen a lot of new capacity come online with the with the Texas plays over the past few months as prices have risen. So what will it take for Texas to kind of install new rigs or re-open rigs and get things moving here? What are you looking for and what do you think the magic number is? I mean, if it hasn’t been hit already? What do you think needs to happen for Texas to kind of reopen some of these fields?

 

VH: Yes, we saw oil rigs across the US, which is a very crucial measurement of the activity in the shale patch, especially. We saw that number crash last year. And I look at the fracturing fleet count as well, which tells you exactly how much oil is being drilled out of those wells. But not just how many wells are being drilled. So both of those have been creeping up from from the crash of last year. I think since about August last year, they they have been moving up. But if you compare year on year still, that the total rig count is just half of the levels before Covid last year. Overall, US oil production and shale is the lion’s share of it has dropped from about nearly 13 million barrels per day to about 11. Two million barrels per day of capacity has basically disappeared from the shale patch.

 

And for OPEC, as well as for the oil market, I think it’s a key area to keep an eye on because we have seen in the previous boom and bust cycles and oil price up and down cycles, that shale was very quick to respond to oil price recovery. I think the story is very, very different this time. There’s a few influencing key factors, which are all pulling in the same direction.

 

So first of all, on a very sort of global level, we know that generally, funding is drying up in fossil fuels. OK, so that’s a baseline. That’s affecting conventional fuel. It’s affecting shale equally. The second is that we see and this has been an ongoing trend over the past few years, more and more majors have made inroads into majors are now independent players still produce the majority of the tight oil from the US shale. But the majors have become quite significant players as well. And almost every major that you tune into is saying that we are going to be very, very cautious in… We’d rather return money. We’d rather pay down debt, cash discipline, essentially. We would rather return money to our shareholders than invest in just growth at any cost. That’s happening.

 

When it comes to independence. I think they’re going their own ways, basically. You can’t say all independents have the same philosophy. But again, when I listen to the major independent players, they pretty much are also into cost discipline strategy. If you aren’t, are going to just have a tough time, far tougher time than than the previous down cycles in getting funding. So we generally see that funding for the shale sector is also starting to dry up.

 

I suppose banks and lenders and shareholders probably just seen enough of that, how sales fortunes go up and down. If you’re a long term investor, it’s not really an area of stability. So all of these put together to lead me to conclude that the EIA thinks shale production will creep up a little bit this year. But of course, compared with 2019, they’ll still remain low. It’s predicting quite a big bounce back in ’22. But I’m not that sure about it. I have a feeling that it’s probably going to sort of plateau from here on.

 

TN: OK. Really interesting. So it sounds like kind of that marginal barrel that would come from shale to be honest, isn’t really that necessary right now given the cost that it would take to reopen the rig. Is that fair to say?

 

VH: Yeah. And then you have to remember that the OPEC is sitting on that marginal barrel of supply as well. And that has to come back into the market. And you have to see prices supported, let’s say WTI, well above sixty dollars. And then ask yourself that have any of these, the three conditions that I outlined earlier changed substantially enough for shale to go into a boom again? So I think the answer is pretty clear.

Categories
QuickHit

Crude oil: New super cycle or continued price moderation? (Part 1)

Energy markets expert Vandana Hari is back on QuickHit to talk about crude oil. Brent is nearly at the $70 psychological mark and is also a 2-year high. However, demand has not picked up to the pre-Covid levels. Vandana explained what happened here and what to look forward to in the coming year. Also, is crude experiencing supply chain bottlenecks like in lumber and other commodities and how oil demand will pick up around the world?

 

Vandana Hari is based in Singapore. She runs Vanda Insights and have been looking at the oil markets for about 25 years now. The majority of those were with Platts. She launched Vanda Insights about five years ago. The company provides timely, credible, and succinct global oil markets, macro analysis, mostly through published reports. They are also available for ad hoc consultations and research papers.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📺 Subscribe to our Youtube Channel.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on May 19, 2021.

 

The views and opinions expressed in this Crude oil: New super cycle or continued price moderation? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: I want to talk about crude oil, because if we looked a year ago and we saw where crude oil prices were a year ago because of the Covid shock and we look at where crude is today, it’s something like two-year highs or something like that today. And we still have kind of five or six million barrels, we’re consuming about five or six million barrels less per day than we were pre-Covid. Is that about right?

 

VH: Yeah, absolutely. So we have had a Brent flood with the $70 per barrel psychological mark, it has not been able to vault it in terms of, you know, in the oil markets, we tend to look at go-buy settlements. So we’re talking about ICE Brent Futures failing to settle above 70 dollars a barrel? But it has settled a couple of times so far this year, just below, which was two-year highs.

 

And the man on the street, as you quite rightly point out, does end up wondering. And I’m sure people at the pump in the US looking at three dollars a gallon prices that hang on like the global demand is yet to return anywhere close to pre Covid. So why are prices going to two-year highs?

 

So two fundamental reasons. If you talk about supply and demand in the oil markets, the first one is the OPEC – Non OPEC Alliance is still holding back a substantial amounts of oil from the markets. If you hark back to last year when they came together in this unprecedented cutback, almost 10 million barrels of oil per day, cumulative within that group, they said they’re going to leave it in the ground because of the demand destruction.

 

Now, starting January this year, they have begun to so-called “taper.” Yes, people borrowed that as well in the oil market. All over the place. Yeah. So they’re tapering. But they’re doing it very, very cautiously.

 

So where do we stand now? They are still holding back almost six and a half million barrels per day. So basically two thirds of the oil that they took out of the market last year is still, they’re still keeping it under the ground. So that’s one main reason.

 

The second one is a bit, of course, demand has been picking up as countries and globally, if you look at it, I mean, we can talk about individual countries, but globally, you know, the world is starting to cautiously emerge out of Covid-related restrictions.

 

Economies are doing better. So oil consumption is moving up. But but some of, it’s not entirely that. I would say some of the the buoyancy in crude of late, and especially when it was, you know, Brent was a two-year highs, is because of a forward looking demand optimism. And when it comes to that, I think it’s very, very closely connected or I would say almost entirely focused on the reopening of the U.S. economy.

 

TN: OK, so. So this is a forward looking optimism, is it? I know into other areas, like, for example, lumber, which has been there’s been a lot of buzz about lumber inflation is because of the sawmills and with other, say, commodities, there have been processing issues and with, you know, meat and these sorts of things that have been kind of processing issues and bottlenecks in the supply chain. But with crude oil to petrol, it’s not, it’s not the same. Refineries are doing just fine. Is that, is that fair to say?

 

VH: That’s a very good point, Tony, to to just kind of unpick a little bit. Because what happens is when you hear talk of super cycles, commodities, bull run, and then, of course, we have a lot of indexes and people trade those indexes, commodity index, we tend to lump together, you know, commodities all the way from copper and tin, lumber and corn all the way to crude oil and gasoline and gas oil and so on.

 

But, you know, here’s what. You know. We could spend hours talking about this. But, but just very quickly to dissect it, I would say look at it in terms of you have commodities. And I would sort of lump metals and to some extent agricultural commodities in this one Group A and Group B.

 

So as I mentioned earlier, Group B, which is which is oil. Well, crude oil and refined products, to a large extent, the prices are being propped up by OPEC, plus keeping supply locked out of the markets. It’s very different from, as you mentioned, what’s happening in metals and ags and these kind of commodities where it just can’t be helped. So there’s supply chain issues, this production issues all the way from from Chile, where copper production all the way to even here in Malaysia, you know, palm oil, because workers are unable to return fully. Or in terms of even the the packaging, the storage and the delivery of it. So I think there’s a major difference there.

 

Now, the commonality here is, of course, all of these are seeing demand rebound. You know, that I agree as a commonality. Demand is rebounding. But I think it’s very important to remember. And why is it why is this distinction important is that you could argue that, well, if demand continues to sort of go gangbusters in terms of copper, tin, lumber, it will, for the foreseeable future, meet against supply constriction. So you cannot.

 

So accordingly, you can assess what might be the prices of these commodities going forward. They may remain elevated, but it would be wrong, I think, to sort of draw a parallel between that and oil, because in oil, I do believe OPEC non-OPEC are waiting. In fact, I don’t think they can hold their horses any longer, waiting to start putting that oil back into the market. So, you know, keep that distinction in mind.

 

TN: So there’s an enthusiasm there. So let’s say we do see demand kind of come back gradually, say, in the U.S., a little bit slower in, say, Europe. But China is moving along well and say Southeast Asia, east Asia is coming along well. The supply from the OPEC countries will come on accordingly. Is that fair to say?

 

VH: Absolutely. And when you talk about demand, again, I think there’s a sort of a bias in the crude futures markets, which tend to be the leading the direction for the oil complex in general, including the Fiscal markets, is that there’s definitely a bias to looking towards what’s hot right now, at least looking towards what’s happening in the US and getting carried away a little bit. Because when you look at the US, it’s a completely positive picture, right?

 

You base that, you see things around, you see how people are just kind of moving away. You’re removing mask mandates, people are traveling. And, of course, we’re getting a lot of data as well. The footfall in your airports. The other thing about the US is you have good data, right. Daily, weekly data. So that continues to prop up the market. But if you just cast your eye, take a few steps back, look at the globe as a whole. And, you know, sitting here in Asia, I can shed some light about what’s happening here.

 

No country is opening its borders in Asia, OK? People are, for leisure. If people are even not even able to travel to meet their family, you know, unless it’s in times of emergency, unfortunately. So nobody’s traveling. The borders are sealed very, very tight.

 

There is an air bubble, travel bubble between New Zealand and Australia. But, you know, nobody’s bothering to even check what that’s doing to jet demand. What do you think it will imagine? You imagine it will do.

 

And then you have Europe in between, which is, yes, again, it is reopening very cautiously, though. We’ve had the UK Prime Minister, Boris Johnson, cautioning that the travel plans for the Brits might be in disarray because of this so-called Indian variant. I don’t like to use that term, but this virus more transmissible virus variant. So it’s a very patchy recovery. It’s a very mixed picture, which is why I’m not that bullish about global oil demand rebound as a whole. You know, at least the so-called summer boom that people are talking about.

 

TN: Do you do you see this kind of trading in a range for the next, say, three or four or five months or something? Demand come, supply come, demand come, supply comes something like that.

 

So there’s not too much of a shortfall for market needs as kind of opening up accelerates?

 

VH: Very much so. I think, first of all, unfortunately, I mean, as individuals, of course, we like to be positive and optimistic. But with an analyst hat on, we need to look at data. We need to use logic. We need to overlay that with our experience of this pandemic, the past one and a half years.

 

Somehow, we’ve had a few false dawns, unfortunately, during this pandemic. We’ve seen that right from the start. When you remember the first summer, 2020 summer, some people said, oh, the heat and all that, the virus will just die away.

 

So, again, I think we need to be very, very cautious. I do think, unfortunately, that this variance and as you and I were discussing off air earlier, this is the nature of the virus. So I think there’s going to be a lot of stop, start, stop, start. The other thing I see happening is that it’s almost like, I imagine the virus sort of it’s moving around. And even if you look at India now, it’s just gone down in the worst hit states of Maharashtra and Delhi. But now it’s sort of moved into the rural area.

 

So I think sort of, unfortunately, is going to happen globally as well. The other important thing to keep in mind is, is vaccinations, of course, is very, very uneven. You know, the ratio of vaccinated people in each country so far, the pace at which the vaccinations are going and, you know, not to mention the countries, the poorer, the lower income countries.

 

So we’re probably going to see, you know, maybe a bit of start. Stop. Definitely. I don’t think we’re going to see national boundaries opening up to travel any time soon. And then exactly as you pointed out, we have this OPEC oil and then, of course, we have Iranian oil and we can talk about that separately. So there’s plenty of supply.

 

TN: So let’s talk a little bit about, let’s talk a little bit about the Middle East with, you know, first of all, with political risk around Israel Palestine. Is that really a factor? Does that, does that really impact oil prices the way it would have maybe 20, 30 years ago?