Saudi Arabia is in a bit of a tight spot right now and it will be very interesting to see what decision they take, Mriganka Jaipuriyar, Associate Editorial Director, Asia & Middle East, S&P Global Platts, tells ET Now.
Edited excerpts:
The renewed price collapse in oil reflects a huge concern regarding the mismatch that is likely going forward between supply and demand. How real are the concerns?
What happened back in October was that the market was very focussed on bullish factors and the uncertainty around Iranian oil supply with the sanctions taking effect in November was one of the main factors that was driving prices up.
What we are seeing now is the focus on the supply situation. You got rising US crude oil production. Libya has come back to produce at one million barrels per day. OPEC and non-OPEC producers have raised their supply by about over one million barrels per day. The supply situation has eased and with the waivers granted on sanctions, Iran is expected to continue exporting for at least another six months. So, the supply situation is looking very easy and that is why prices are going down.
Add to that, the stock market is falling and that has raised concerns about the state of global economy. All that will have an impact on oil demand growth going forward. There is a softening demand scenario while supply is looking quite sufficient.
Stock markets have played an important role vis-a-vis liquidity, fall in the FAANG stocks etc. Even if the data is not so negative, what are the prices reacting to at this point of time?
US crude production has hit 11.7 million barrels per day and that is above what the market was expecting, given the lack of pipeline takeaway capacity from the US. Iran is expected to continue exporting 1.1 to 1.2 million barrels per day well into the first quarter of 2019 with the waivers granted. Hence the supply situation. Stocks are starting to rise. They they had fallen below five-year average levels and we are now seeing the inventory build up coming in as well.
The Saudi energy minister did say that Saudi Arabia will begin cut in production at about 500,000 barrels per day starting December but is that going to be enough? Saudi Arabia is probably producing 11 million barrels per day in November. So 500,000 barrel per day cut in December may not be sufficient to tighten the market. What OPEC and Russia decide in December in their meeting in Vienna is going to be an important factor when one looks ahead at the oil markets.
At some level, are you expecting a kind of pullback in supply going forward?
Well OPEC and its allies have said that they will look to rein back the one million barrel per day production that they decided on back at their June meeting. Saudi Arabia and Russia have unanimously talked about pulling that back in. So there is that talk but then, you have US President Donald Trump coming in and clouding the picture a little bit.
Saudi Arabia is in a bit of a tight spot right now and it will be very interesting to see what decision they take. OPEC has always maintained that market stability is their aim. So, it will be interesting to see how the politics is going to play into it.
Would that also have a cascading impact on some of the other commodities? We have seen steel and other commodity prices coming down.
Yes, there are concerns around global growth. The US-China trade war has raised concerns around global growth. There are concerns around the rate at which the Chinese economy could continue their expansion. They have started to rein in the bank loans. All of this is going to have an impact on demand and China is the biggest demand powerhouse in the world right now. The Chinese economy has started to slow down and there are some signs of that on the power side. Coal demand has gone down because the industrial production houses are not operating at the rates at which they were operating a few months back. So, the concerns around global economy will impact all commodity prices.
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