OPEC+ actions cause wavering

Recently, the Organization of the Petroleum Exporting Countries (OPEC+) – which includes Saudi Arabia and Russia – said it would cut production by two million barrels a day. While this isn’t the first time OPEC+ has done this, it has created some float in the market given the current geopolitical situation.

The reason for OPEC+ is obvious: to keep oil prices from falling.

But that can’t be a long-term decision as OPEC+ can’t go ahead without worrying about the impact of such decisions on demand – as high prices create more worries about recession and destruction of demand. Therefore, OPEC+ must consider consumers like India and China.

India’s position

Hardeep Singh Puri, Minister of Petroleum and Natural Gas, recently said, “India will buy oil wherever it needs to for the simple reason that this kind of discussion cannot be conducted with the consuming population of India “.

Asked about Russian oil, he replied: “No one told India to stop buying oil from Russia. If you are clear on your policy, which means you believe in energy security and energy affordability, you will buy where you need to buy energy from sources.

This was reportedly said by Puri after his meeting with US Energy Secretary Jennifer Granholm.

More recently, Puri speaking at the fifth South Asia geoscience conference, Geo India 2022, said, “At present, five million barrels of oil are consumed every day in our country and it is also increasing by three to cent, which is greater than the world consumption. average of about one percent.

Clearly, the sheer size of India’s demand gives it a voice in the global market and if consumers like India and China join forces, then it will become difficult for producers to play on price.

According to Ehsan Ul-Haq, principal analyst at Refinitiv in London, “Although the announcement is for 2 million barrels per day, my assessment is that it will be much less and on a pro rata basis. This is a short-term reaction.

The International Energy Agency’s October oil market report took a similar line: “OPEC+ supply cut will be less than the announced 2 million bpd cut production, with the majority of alliance members already producing well below their caps. due to capacity constraints.

“Our current estimate calls for a decrease of around one million barrels/day in OPEC+ crude oil production from November, with the bulk of the cuts coming from Saudi Arabia and the United Arab Emirates. Further production losses could come from Russia in December, when an EU embargo on crude oil imports and a ban on maritime services come into full effect.Russian officials have threatened to cut oil production in order to offset the negative impact of price cap proposals,” the report said.

Modified scenario

Why is it different this time? “While previous large oil price surges have spurred a strong investment response leading to increased supply from non-OPEC producers, this time may be different. U.S. shale producers, traditionally the largest responsive to changing market conditions, grapple with supply chain constraints and cost inflation – and so far maintaining capital discipline.

This casts doubt on suggestions that higher prices will necessarily balance the market through additional supply,” the report states.

Obviously, this will lead to the destruction of the market.

“What’s more important is to see how demand will react to higher prices because there’s a lot of inflationary pressure in Europe and some other consuming countries as well. For the developing world, it’s a double blow: high fuel prices and a strong dollar (oil is mainly traded in dollars),” said Ehsan Ul-Haq.

A drop in demand will have an impact on producers. “Supplier countries need to consider whether to manage high food prices or fuel prices, because even food prices are high, which has put inflationary pressure on economies. They (provider countries) will have to manage both and there will be a destruction of demand for food as well as fuel,” he said.

Not to mention the scene in China, he pointed out. “The demand in China has not increased as much as before.” The largest consumer of oil out of a total of 99.6 million barrels per day is the United States, followed by China and India. Although the United States is also the largest producer today, it still needs to import 10-11% to meet its demand. India, meanwhile, imports more than 80% of its oil needs.

On whether the latest decision will mean India will source more Russian crude, he said, “let’s remember that most Indian refineries can only process a limited amount of Russian oil due to the quality of the crude Indian refiners depend mainly on West Asia for supply.

Robin Mills, CEO of Qamar Energy, an energy consultancy and consulting firm, said: “India can’t do much in the short term, but it is continuing the rise of electric vehicles. It should try to avoid fuel subsidies or tax cuts and instead protect low-income consumers in other ways.

“The oil price cap (as discussed by the G7) is possible, but it will have major unintended consequences. India needs to think about how it secures the benefits of the price cap and how to redistribute them to consumers,” he added.

A middle way that harms neither the producer nor the consumer is the ideal situation.

For India, the challenges are: demand — to meet its demand, it must import; subsidy — to protect consumers, an artificial ceiling is imposed on the retail price; and currency outflows—oil is purchased in dollars.

While transitioning to other energy sources and increasing fossil fuel production is an ongoing process, India, due to its sheer consumer base, can negotiate on prices, if it stays consistent. in its approach and does not bow under international pressure as it did during the Iranian sanctions.