Expect crude oil prices to test new lows: Platts

Vandana Hari, Asia Editorial Director of Platts feels the oil output freeze agreed to by certain members and non-members of the Organization of the Petroleum Exporting Countries (OPEC) may not do much to mop up the nearly 2 million barrels per day surplus supply currently in the market.

Hari believes the agreement is tentative and highly conditional as nothing is on paper yet and that nothing short of a cut of a 1.5-2.0 million barrels per day will really provide a sustainable floor to oil prices.

Crude oil prices are likely to test new lows, she says, adding it is critical that prices sustain for a longer period at whatever level they fall to. "Only when prices sustain at a level will they effectively cut out the excess uneconomical barrel in the market and ensure long term stability," she says.

She points out that in Asia there is a distinct consumption shift from industrial fuels like diesel, fuel oil etc., which are seeing significant demand decline to consumer fuels like gasoline, LPG etc.  Below is the verbatim transcript of Vandana Hari’s interview with Nigel D’Souza and Reema Tendulkar on CNBC-TV18.Reema: Although we have seen a bit of a correction in the last two days in the crude market, from the lows in January, crude prices have bounced back nearly 40 percent. What led to the bounce and do you believe it is sustainable, do you think there is more upside in crude prices? A: I think it is important to bear that a lot of the recovery we have seen in crude prices this month, is what is called job owning. Basically a lot of talk and a lot of news headlines coming out of efforts by a few Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC member countries, so, we have had Russia, Venezuela, Saudi Arabia and Qatar agreeing to a very tentative and a highly conditional output freeze. Now, of course those who in the market who can dissect beyond these headlines will know that it doesn’t really mean anything right now because it is very conditional, it is not really been signed upon and an output freeze will not really do anything to mop up the nearly 2 million barrels per day of surplus supply that we have in the market right now. Nothing short of a cut of at least 1.5-2 million barrels per day will really provide a sustainable floor to oil prices right now. Nigel: We had an OPEC meeting last evening and they said that global demand for crude will be less than previously thought. In that context, what is your sense on oil prices for this year?A: I think USD 40 per barrel it would have been too premature to call it a bottom. It is quite likely that oil will continue testing new lows. We saw Brent fall below USD 28 per barrel in January. More importantly whatever level it goes down to, it needs to sustain at that level to really effectively cut out the excess, the marginal oil, the uneconomical barrel that is being put into the market for a long-term stability. Now, until and unless that happens, I would expect the market to be braced for first of all testing new lows and second of all, a lot of volatility because if you go back to fundamentals, if you look beyond the headlines of whatever OPEC is trying to do or not trying to do, you have to look at the fundamentals where there is still over supply. There is still a lot of incremental barrels expected from Iran, there is also a lot of uncertainty because Iran has promised or threatened shall we say up to a 1 million barrels per day more now that it is free of sanctions though realistic expectations are it will supply more like 0.5 million barrels per day more until the end of this year. However, a lot of these pieces still need to fall into place. The other piece of the puzzle that is demand, there are expectations of oil demand growing by about 1.2 million barrels per day this year, much less than what it grew in 2015. However, there are question marks on that as well because that demand growth is very closely tied to the economic fortunes and especially in areas like Europe now where there is a great deal of uncertainty as well as in the emerging economies of Asia. We really need to see a lot of these factors becoming clearer before we can say where oil might find a bottom or how much lower could it go.Reema: Where do you see oil prices in 2016 considering that there are concerns about global growth slowing down?A: When you look at oil demand, it is very closely tied to economic growth. The other story we have seen in Asia and we will be discussing some of these very interesting developments at our forum later today in Delhi is that there is a very distinct shift happening from what is your industrial fields like diesel and fuel oil, which we have seen whose growth is either going down, negative territory or flattening. And on the other hand, we have what you might call consumer products or consumer fuels like gasoline, LPG, jet fuel – a lot of airline travel happening – very strong car sales happening in countries like China and India which are fuelling the consumption of gasoline, so gasoline, naphtha which is a feed stock for petrochemical products. Now, rapid urbanisation, rapid rise in the middle income classes in these countries is fuelling growth for petrochemicals as well. So, we see this dichotomy happening as well. The reason this does not pan out into a strong overall demand growth, is that diesel remains still the bigger part of the barrel as far as oil consumption is concerned in Asia. So, though your gasoline, LPG and naphtha are growing, they are not going to contribute to as strong an Asian oil demand growth as we saw in the more industrial activity fuelled boom of the past few years.