By Arjavi Indraneesh
Analysts are noticing a new kind of dynamism in the oil market, which seems to have set off a mechanism of internal management of the demand-supply situation, anchoring it on the overall state of the global economy. This is a welcome development for countries like India, which faced the risk of price spiral in the wake of the recent attack on the Saudi oil refinery and its dangerous implications for the economy.
The crude oil pendulum had dramatically swung towards higher oil prices in the aftermath of the deadly attack, taking Brent to the $60 band from the $50 per barrel range it has been bound for quite some time. The attack on the world’s biggest oil processing plant in Khurais and Abqaiq in Saudi Arabia temporarily knocked out 5 percent of world supply, which triggered almost a panic reflex in crude prices.
For a couple of days, the uncertainty resulted in major price swings before Saudi officials calmed the markets after saying that supplies would be restored sooner than the market had feared, despite the fact that the severity of the attack was estimated to be much more serious than it was thought to be in the beginning.
Analysts say that considering the amount of oil replaced by the development, the impact would have been a lot more painful, but for the fact that the market was at that time facing the risk of emerging gluts in the face of weak demand growth. So the market itself seems to have made internal adjustments, weighing in the rising oil prices in the context of a global economic slowdown. This is probably the reason why the prices deflated as quickly as they spurted.
Although this is a matter of great relief to countries like India, already struggling to cope with one of its worst cycles of demand slump, the world may have to get used to a slightly higher range of crude prices. This is attributed to the apparent weakness of Saudi Arabia to adequately protect its assets. Analysts say the risk to supplies from a geo-political escalation should keep the prices supported during the coming weeks, stocks despite the fact that the oil kingdom has ruled out any risk of supply shortfall as it taps into the domestic stockpile.
Aramco has reassured markets that around 40 percent of the 5.7 million barrels per day production shut-in has now been restored and that it expects the Abqaiq oil processing facility to reach full operational capacity by the end of September.
But according to independent assessments, the resumption of full capacity may be slower than the Saudi expectations. Leading oil consultancy Rystad Energy estimates that the levels of pre-attack processing capacity may be reached only towards the end of the year. Rystad has developed two production ramp scenarios, based on the current Saudi production, spare capacity and Aramco’s own plans to restore production.
In its ‘slow restart’ case, the processing facility will reach only 45 percent of capacity by the end of September, compared to 40 percent currently and 65 percent by the end of October. In the ‘quick start’ scenario, the processing facility reaches 65 percent capacity by the end of September and 100 percent by the end of October.
The consultancy forecasts a balanced market by 2020, which means that the prices would fall back to more comfortable levels for the importers. But a balanced market also implies that the global economy does not enter a technical recession and that demand recovers to around 1.2 million bpd growth. For this to happen OPEC needs to maintain current production levels, with extended cuts through at least 2020, while the introduction of stricter shipping fuel regulations – the so-called IMO 2020 effect – will cause a net positive effect on crude demand growth next year of about 1.0 million bpd in order to balance the global gasoil market.
This should gladden the hearts of the managers of Indian economy, who face heightened fiscal risks on account of reform measures announced by Finance Minister Nirmala Sitharaman in a series of stimulus packages. With tax collections refusing to add up, government finances are under significant strain. The additional strain the risk of higher oil prices would have brought to bear on the economy would have been horrendous. To that extent, the emerging oil scenario warrants a sigh of relief. (IPA Service)