Opec cut may not fire up oil prices

Just when it looked like oil prices cooling off had offered some respite to India's macros, Organisation of the Petroleum Exporting Countries (Opec) decision to cut back production by 1.2 million barrels per day is threatening to heat things up again.

Last week, Brent crude, the international benchmark for oil prices, surged 4.9% to $63 a barrel in early morning trade, right after the announcement of cutback by Opec and Russia.

Most energy experts, however, don't see crude prices running away like in the past. They believe the current market situation is very different, with slowing oil demand due to weak global economic growth and the emergence of several alternative energy sources.

Debasish Mishra, partner of Deloitte India, told DNA Money the Opec move will "definitely" have an upward bias on prices, but it may not sustain for long due to the current structure of the market.

"As such, it (Opec trimming oil supplies) will definitely have an upward bias (on prices). But structurally, there is still too much oil in the system to take care of any abnormal rise in prices. If there is any major spike then more oil comes out of the US. So, it is difficult to say where it (prices) will go," he said.

Mishra feels that in the existing structure there were many price stabilising factors; "like demand slowing down and US ramping up supplies. That (US upping supplies) itself could act as a dampener to oil running away but you cannot predict anything. We have seen oil moving up so rapidly and sliding down as well with equal speed. Nobody had predicted that oil would come down so rapidly. Most of the big oil trading houses were saying oil would go up to $100 per barrel, but it went down below $60 per barrel".

Crude prices have been volatile this year with prices progressively surging to $86 per barrel till October and then slumping about 30% to fall under $60 per barrel. The production-cut deal has come at a time when oil prices has sunk to its lowest level since the 2008 financial crisis. The petroleum exporting countries, including Russia and others, had capped supply since January last year, but agreed to pumped up production in its bid to balance the market. The market is falling short of supply because of a drop in Venezuelan output and supply disruption in Libya.

Last week's decision will see the 15-member Opec cartel and Russia and its allies removing 1.2 million barrels per day off the market in the first six months of 2019. As per the deal, Opec will reduce its output by eight lakh barrels per day, and Russia and the allied producers will snip their production by a flour lakh barrels per day.

Deloitte's Mishra said at a certain level of the price, Opec will start losing market to US shale players.

Deepak Mahurkar, partner and leader, oil & gas, PwC India, said while he had not worked out any projections based on an economic model, economic agencies generally forecast a $10 per barrel rise on the kind of production slash taken by Opec and its non-Opec allies.

He, however, does not see the last week's move having the potential to take the crude prices up by $10 per barrel; "many countries and companies are already preparing for alternative energy to crude oil".

According to Mishra, withdrawal of 1.2 million barrels per day from the market will balance the price and demand-supply equation.

He said with the demand slowing down in a big way next year, reduction by Opec will balance demand-supply.

"This year demand is expected to pick up by 1.6-1.7 million barrels per day because of a crisis in emerging markets like Argentina and Turkey. You also have the trade wars between China and the US. All these are expected to slow down demand to 1.2-1.3 million barrels a day. Plus, almost three-fourth of the additional demand is getting catered by the US," said Mishra.

Sambit Mohanty, senior editor, Asia-Pacific, S&P Global Platts, also said lower oil supplies will stabilise price at $60 per barrel.

"The production cuts will likely help to provide stability to crude prices above $60 a barrel. The cuts can be viewed as a reasonable response to balance the market," said Mohanty

Mahurkar said India was moving away from crude and increasing utilisation of gas and other energy.

"Gas is not only cheaper but also available abundantly. It doesn't have a cartel like crude oil and has a more diversified source of supply. Also, almost 80% of the utilisation of crude products are replaceable by gas. India is getting better prepared with facilities for gas logistics and LNG regasification. There is enough coast line available to India to import LNG and other gases. Geographically, India is at an advantage. Alternative and renewable energies are maturing fast. This will keep crude prices in check," he said.

Taming of the crude prices will only benefit India, which depends on imports to meet over 80% of its oil needs. Even a slight jump in oil prices makes its balance of payment go awry, and hits the rupee value.

ABUNDANT ENERGY

• 4.9% – the Brent crude surged in early morning trade last week to $63 per barrel
   
• 1.2mn – barrels per day withdrawl will balance the price and demand-supply equation
   
• $100 – per barrel was expected by most of big oil trading firms