Yesterday’s post described how OPEC oil producers are seeing their export sales to the US start to disappear. But this, of course, is only one side of the story. As the chart from the Wall Street Journal shows, Saudi needs a $93/bbl oil price to balance its budget. Most of OPEC needs a higher price. Only Kuwait, UAE and Qatar need less.
Most analysts choose to focus on this question. But important though it is, it is not the key concern. We are in the New Normal – where demand growth may no longer exist, and suppliers have to fight for market share. As the International Energy Agency has warned recently, “the recent slowdown in demand growth is nothing short of remarkable.”
A moment’s thought, after all, reveals that there is no point in having a high price if it becomes purely nominal. OPEC countries will have no income if they cannot sell their oil barrels.
The coal market provides a vivid example of the problem. 50 years ago, it was common to assume the world was running out of coal. Today, however, coal is being left in the ground, as it is no longer needed.
ASIAN OIL DEMAND IS NO LONGER ON A GROWTH PATH
Developments outside the US provide a vivid wake-up call. Already Asia has become unable to accept cargoes of Russia’s highly valuable Sokol oil. The economic slowdown, and increasing African competition, means the market is over-supplied. So it has been forced to travel to California to find a home.
Even worse, from the producer viewpoint, is that Asian governments are being forced to cut back on fuel subsidies.
China has been doing this for some time, and now indexes domestic prices to world levels. India began cutting them last year, and the new Modi government is now increasing them to world levels. Indonesia will have to follow and increase them by 23%, as the end of the commodities boom makes it impossible to fund subsidies.
Already the subsidy cuts have slowed India’s growth in diesel sales to zero, from up to 11%/year growth in the past. Clearly the pattern is now being repeated across Asia.
And one immediate result is that Indian refiners are demanding better terms from Saudi and Iraq. Bloomberg reports payment terms are likely to be extended to 60 days – essentially a price cut by another name.
Global oil consumption growth had already slowed to 1.2%/year before these changes, as the blog discussed back in July. Western oil consumption has been falling for some years, with even US consumption falling 0.6%/year since 2008. And this trend is likely to continue:
- US Dept of Transport data highlights that “as we age, we drive fewer miles“
- Similarly, the world is now entering its “peak car” moment, where sales will start to decline
- High prices have also spurred moves to gas, and to increased fuel efficiency
Thus oil producers are now effectively in a battle for market share. This is not only between themselves, but also against other forms of energy such as gas and renewables. Those who lose, like coal producers in the past, will have to shutdown.
Saudi Arabia knows this. And its reliance on the US for its defence needs means it has to be amongst the winners.
Tomorrow the blog will look at the key question of what these changes in supply and demand balances will likely mean for prices.