Energy Analytics

Oil Rally Roils Producer-Consumer Relations

byEnverus

Economic logic dictates that lowest-cost oil producers will survive longest once oil demand peaks, plateaus and starts to decline. In a shrinking market, OPEC low-cost oil producers, mostly operated by state-held national oil companies, should be able to maintain their market share and even expand it as higher-cost competitors falter.

But if the volume outlook is broadly positive, OPEC producers’ oil price hawkishness comes at a price. OPEC’s readiness to extend an oil rally that has lifted Brent $15/bbl so far this year (Figure 1) is creating tensions with some of its key strategic customers. Indian government complaints about high oil prices drew a somewhat undiplomatic response this month from Saudi officials, who proposed Indian refiners draw down cheap oil stocks purchased when crude prices were at their 2020 lows. Saudi officials justified its hawkish price stance by pointing out that producers were only now recouping revenue losses incurred last year.

Saudi Arabia primed Brent’s rally through its slow and cautious return of output cuts, conservatism it justified by pointing to a raft of uncertainties besetting the global economy. But Riyadh has been less quick to acknowledge that a building headwind to economic recovery post-COVID-19 has been the sharp run-up in commodity prices themselves, particularly energy. For oil, it has been unilateral Saudi cuts this year and Saudi pressure to slow the return of OPEC+ cuts that has driven oil prices higher and roiled consumers.

Unsurprisingly, Indian government officials were unimpressed. Delhi has now injected fresh momentum into efforts to diversify its sources of crude away from Middle East producers. February import data suggests this policy is beginning to bear fruit with Indian refiners taking more U.S. and Nigerian oil at the expense of Saudi and U.A.E. barrels, where import levels were at multi-year lows. Further reductions to Saudi imports are evident in nominations for May deliveries.

Changes to Indian refiners’ import slates will not reduce oil prices, so diversification of imports is more symbolic than meaningful. But it does highlight growing tensions between the Gulf’s largest oil exporter and one of the remaining growth markets for exported oil. In this price cycle, OPEC producers might be advised to pay close attention: the removal of domestic fuel subsidies in recent years means Indian consumers’ capacity to absorb oil price rises is reduced.

At the same time, Iran, whose oil exports have been constrained by U.S. sanctions since the Trump administration withdrew from the 2015 nuclear deal, is playing a very different game. With prospects for a diplomatic breakthrough improving, Iran has started re-engaging with Chinese buyers, particularly Shandong independent “teapot” refiners as well as Indian state and private buyers.

Iran has a long history of sweetening terms for its crude by allowing buyers to pay in local currencies, take advantage of deferred payment terms, use barter arrangements and offer price discounts. Whether such a flexible approach reflects Iran’s immediate need to carve out its market again or whether it will endure longer term remains an open question. Iran is unlikely to miss out on the opportunity to undercut competing Arab Gulf barrels, even if temporarily, in what is likely to become a febrile oil market for producers in the years ahead as demand shrinks.

From the Saudi perspective, the continued recovery in demand means extra Iranian barrels will be absorbed and that short-term discounting presents less of a challenge. As annual oil demand shrinks and flatlines, these kinds of behaviors will raise tensions both between petrostates and their customers; and also between producers themselves, increasingly chasing the same customers.

FIGURE 1 | OPEC+ Meetings and Brent Price

 

Enverus

Enverus

Energy’s most trusted SaaS platform — creating intelligent connections that uncover insights and opportunities to deliver extraordinary outcomes.

Subscribe to the Enverus Blog

A weekly update on the latest “no-fluff” insight and analysis of the energy industry.

Related Content

Enverus Blog - Analyst takes: 6 January energy trends you need to know
Intelligence
ByErin Faulkner

Over the last few quarters, executives at U.S. upstream operators have grown accustomed to analysts asking about cost inflation. It’s an inevitable part of every conference call. During the late July to mid-August earnings season for Q2, the question shifted...

Enverus Blog - Energy Transition Today: EPA jumpstarts EV uptake
Energy Transition
ByKevin Kang

Behind the meter (BTM) solar is a key factor in decreasing load in CAISO, especially in California where it has the most impact on annual demand. The state’s potential for nearly 195 GW of rooftop solar capacity exists, although its...

Enverus Blog - 3 price management capabilities to offset cost inflation
Energy Transition
ByKiana Cruz

Seismic surveys are a vital tool in the oil and gas industry. Effective use of seismic surveys allows industry professionals to identify prospects, assess potential resources, reduce risk and even quantify reserves – in short, to make well-informed decisions that...

energy-transition-group-of-professionals-meeting
Energy Transition
ByAlex Nevokshonoff

While we are still waiting for guidelines from the IRS regarding hydrogen incentives released with the Inflation Reduction Act (IRA) last year, it is clear that supportive policy must be in place for green hydrogen to compete in existing hydrogen...

Enverus Press Release - Breaking down the CCUS basins
Energy Analytics Energy Transition
ByEnverus

Panel discussion with CCUS experts from Enverus EVOLVE Conference Introduction CCUS offers a promising solution to curb greenhouse gas emissions by capturing CO2 from industrial sources and power plants and storing it underground. CCUS has gained significant attention in recent...

young-businessman-businesswoman-using-a-digital-tablet-in-a-modern-office
Analyst Takes
ByChris Griggs

As we usher in the month of August, it’s an ideal moment for retrospection on the past month’s shifts and trends in the energy sector. Our proficient Enverus Intelligence® | Research (EIR) team has delved into critical trends and innovations,...

peer-stories
Energy Transition
ByCarson Kearl

The Vogtle Unit 3 nuclear reactor began its commercial operations at the end of July. Based in Georgia, the facility will provide clean electricity to the southeast U.S. for likely longer than the next half-century. This marks the first U.S....

Enverus News Release - Energy impacts of Gulf of Mexico hurricanes quantified
Trading and Risk
ByEnverus

Navigating dynamic commodity markets and managing large volumes of data is no small task. That’s why we’ve built a powerful CTRM solution to help aggregate and leverage more than 500 data sources alongside your own proprietary data, providing an unsurpassed...

energy-transition
Energy Transition
ByScott Wilmot

Historical factors and trends are becoming less descriptive of future power demand. The growing pace of electrification and electric vehicle (EV) adoption are changing the power demand dynamics. At the same time, more customers are installing behind-the-meter (BTM) generation to...

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Sign up for our Blog

Register Today

Get Energy Transition Research updates straight to your inbox by filling out the form below.

Sign Up

Power Your Insights

Connect with an Expert

Access Product Tour

Speak to an Expert