Oil prices hit their highest in over three years on Wednesday after US President Donald Trump threatened to fire missiles at Syria in response to a suspected chemical attack last week. London – based PAUL HICKIN, associate director at S&P Global Platts shares his thoughts on the road ahead for the oil markets with Puneet Wadhwa on the sidelines of International Energy Forum (IEF). Edited excerpts:
Where do you see oil prices (Brent and WTI) averaging out over the next one year?
The oil market is walking a tightrope but the risks to prices appear to be to the upside, given uncertainties around production in countries such as Venezuela and Iran and the fact that the US shale revival is unlikely to offset the production cuts from the 24-member production cut alliance between OPEC and non-OPEC producers coupled with healthy demand growth. However, one cannot ignore the geopolitical uncertainties and whether the global growth story is as sanguine as some of the forecasts suggest.
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Saudi’s want oil near $80 a barrel before they launch Aramco’s initial public offer (IPO). Do you see oil at those levels over the next one year?
We expect the oil markets to over-tighten in the second half of the calendar year 2018 (CY18). This ultimately will push prices higher. It certainly is a plausible scenario that oil prices hit and go beyond $80 a barrel over the next one year.
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Saudi Aramco has been offered a stake in an upcoming refinery in India. What will be the likely impact on the existing Indian players?
The deal shows the commitment to diversifying India’s oil & gas industry. This is a long-term venture and by the time the refinery is up-and-running (target is around 2025), the oil & gas market could look very different. Till then, there will be no impact on Indian players.
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The current saber-rattling is certainly creating uncertainty and undermining sentiment. Geopolitical risk, including that associated with the recent failed attack on a Saudi oil tanker in the Red Sea, a key shipping route, can add a premium to the market.
How are the oil markets viewing trade war fears?
The US’s role will be pivotal for the oil market. A potential trade war between the US and China could threaten global oil demand and even target US exports. The oil market has been focused on the sharp rebalancing that has been underway since the 1.8 million barrels per day production cuts implemented by the Opec-Russia pact since January 2017, so it would signal something of a turnaround.
The commodity complex is certainly vulnerable to an escalation the current spat, with fears casting a lugubrious shadow over market sentiment. Trade protectionism has emerged as one of the top risks for commodity demand and prices this year.
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But, won’t shale oil be able to diffuse a flare up in oil prices?
Concerns remain with respect to the response of US shale oil to higher oil prices, so it depends how high and for how long prices rise. However, the shale hype seems to be over, with CEOs and management teams being held strongly accountable to deliver positive cash flow over production growth even with oil prices above $60 per barrel.
What are the implications for India?
The outlook for Indian demand remains upbeat and should bounce back after a bumpy 2017. Platts predicts a demand of 300,000 barrels per day in 2018, up from 120,000 barrels per day in 2017. However, crude oil prices are rising and that can't be downplayed. It's certainly adding to the worries of India's policymakers. If crude oil rises further, some key fiscal reforms undertaken in recent years would have to be tweaked — for instance, consumption taxes — to soften the impact of high prices. In addition to oil, the liquefied natural gas (LNG) market in India is also witnessing a dramatic change in demand patterns, with demand growth set for sharp rises this year and beyond.
How do you see the Opec respond to these developments?
The 24-member pact makes up close to 50 per cent of global crude supply and while it holds together, it will continue to exert a degree of control over the oil market fundamentals that shape prices. After all, since the current Opec-non-Opec deal, prices have recovered, the market moved into backwardation dis-incentivising storage and the market is close to balance, so Opec if anything has taken control of the narrative again.
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What about the demand-supply dynamics?
The risks for oil are skewed to a supply deficit rather than a glut. Opec will want to demonstrate compliance through to the end of the deal which expires at the end of 2018, but will be starting to worry whether the market has enough oil. This means they may have to find a way of introducing some flexibility into its current market management. The reality is that few producers have any spare capacity and with Venezuela declining and Iran likely to face some sanctions it feels like there is more downside right now than upside. As such Russia and Saudi Arabia may need to prepare to put more oil on the market at some point.