Category
📺
TVTranscript
00:00 Vandana Hari of Vanda Insights is joining us to give us some perspective on that this morning.
00:04 Vandana, thanks so much for taking the time and for speaking to us this morning.
00:08 First, of course, could you give us a sense of what you made of the latest announcement by the
00:13 OPEC+ consensus seems to have been built. Was that something that you were expecting?
00:17 Good morning. So absolutely, I think the market had baked in a rollover. OPEC didn't really have
00:25 too many options. The 2.2 million barrels per day of cuts, had they removed them,
00:32 it would have sent crude prices spiraling down. And I would say there's at least $6 to $7
00:39 per barrel of risk premium on account of the Gaza crisis. So should a ceasefire there come
00:47 into fruition, we could have seen crude going towards $70 a barrel. And that's really the
00:53 pain point for OPEC+. It wouldn't want to see that. So there wasn't any option. I think
00:58 the market will remain focused on the fact that OPEC is making these decisions for very short
01:04 periods at a time, which is quite a departure from the past. When it would announce cuts,
01:10 especially it would announce them for an entire year in advance. Now we are seeing them being
01:16 rolled over from quarter to quarter. Does that make it harder for the research
01:22 community and for watchers of crude oil to really predict the direction that it's heading?
01:27 Big question. There's a great deal of uncertainty, unpredictability and a wide divergence in the
01:35 community of analysts. And that includes analysts that work for OPEC, the International Energy
01:41 Agency, the US Energy Information Administration, wide divergence on the outlook, overall outlook,
01:48 supply demand balances through the end of this year, and especially focused on demand growth.
01:54 So if you just look at all the analyst expectations or predictions out there,
01:59 it's in a range of 1 million barrels per day annual growth, which would be, I would call that
02:06 very, very modest, to as much as 2.2. And on the very optimistic side, of course, is OPEC. So that's
02:13 another intriguing factor for the market that OPEC on the one hand is very bullish on demand growth,
02:20 putting it at 2.2 million barrels per day this year. And at the same time, it appears very
02:27 cautious and careful and almost fearful of prices going down, which is resulting in these cuts.
02:37 Interesting. I want to try and break this down, Vandana, into two parts so that my viewers get
02:42 a sense. And bear in mind, of course, that they don't watch this market on a daily basis. So I'm
02:48 going to try and break this down on the demand side pulls and on the supply side as well. We've
02:52 kind of spoken about supply side, but on the demand side, what are the inventory levels in
02:56 places like the US and also the China factor tell you about the path going forward? Of course,
03:02 knowing that it's a little uncertain right now. Yeah, it's as you quite rightly point out,
03:08 quite a complex market, a lot of factors to take into account. If you look at the US inventories
03:12 on a very, very short term basis, so let's say just from January, US inventories have actually
03:17 been rising. And we're talking of crude here, because US refining throughput has been very low,
03:25 some because of unforeseen outages at refineries because of the cold snap and so on in Jan and Feb,
03:32 some because this is the traditional maintenance season for refineries. But if you take a slight
03:38ly longer term view and zoom out a little bit into overall OECD inventories, which is the most
03:43 transparent and most closely watched by the markets, OECD inventories have actually declined
03:49 through the end of last year and are expected to decline through the first, let's say, first
03:56 quarter of this year. I think the market is more worried about what happens to supply demand
04:01 balance and inventories going out into the remaining three quarters of this year. And
04:06 that's where, as I mentioned, the market is very, very divided on whether it's going to be a supply
04:10 deficit and result in a little bit of a pull out of inventories. But the majority view right now
04:17 appears to be that it will be a surplus and lead more oil flowing into inventories, which is bearish
04:23 for the market. Finally, what role would US producers play in keeping the prices capped
04:29 to a certain extent? As a layperson watching the market, I think the expectation is that at higher
04:35 levels, you have US producers that come in and supply more. Is that the right understanding to
04:41 have? Yeah, absolutely. When you look at the supply scene, you wouldn't be too wrong if you
04:46 are not a specialist to focus pretty much on what's happening in the US, to some extent in Canada,
04:51 places like Guyana, Brazil, which are all increasing production. US production jumped up by nearly a
04:58 million barrels per day last year. It took a lot of people by surprise, including some of the shale
05:03 producers in the US. This year, the jump is not going to be that big. But keep in mind that US
05:08 production has now reached, not only recovered from the hit of COVID, but reached all time highs
05:14 of around 13 million barrels per day. That's 13% of global production. And of course, it's totally
05:20 dependent on if the economics work, if the prices work for the shale producers, and at current levels,
05:25 they definitely do, they will continue producing. So as I said, not that much of a jump expected,
05:31 probably 200,000 to 300,000 barrels per day year on year growth. But the US, yes, it is putting a
05:37 lot of additional oil into the market, which is, you know, obviously something that OPEC+ needs to
05:43 keep an eye on and, and respond to in the form of cuts, if it wants to keep a certain floor,
05:50 or maybe even prop prices up to a certain desired level. Okay, last quick question, Vandana. Based
05:56 on everything that we've spoken about so far and your own expectations, what is the range that you
06:01 expect for Brent? I'm quite conservative, you know, compared to I suppose, some of the more bullish
06:06 voices you hear in the market. I think, you know, once this geopolitical fear premium is gone, and
06:12 I do believe it will be, it'll be a short term, probably arrangement, but there will be a ceasefire.
06:17 And one way or another, look, this is the election year in the US, the US will do everything it can,
06:21 and it does have a great deal of power in this, in this Middle East crisis, it'll do everything
06:26 it can in its power to keep prices low at the pump. So I am expecting high 70s, around 80 as
06:35 an average for this year. Thank you so much, Vandana, for joining in and giving us that perspective.
06:40 Thank you.