The demand for fossil fuels will be around for many years to come and oil demand will only peak around 2040. Oil demand growth will increasingly be for petrochemicals as fuel demand slows/declines, JY Lim, Director, Asia-Pacific Oil markets, S&P Global Platts said in an interaction with Moneycontrol.
“By 2050 oil refining volumes may fall by as much as a third as investors and governments around the world pursue a faster pace of energy transition to combat global warming,” Lim added.
Based out of Singapore, Lim holds an MS in Operations Research and an MBA, with a PhD in Economics. Currently, Lim works as Advisor of Asia-Pacific Oil Markets at S&P Global Platts Analytics in Singapore and part of his role is to develop Platts Analytics’ outlook for Asian crude and product markets.
Lim said that the global oil stocks remained relatively stable and above normal in Q1 2021. However, with Q2 output likely to see less growth as a result of the OPEC agreement, balances will tighten earlier and through Q3 as demand increases. But by Q4, the likely return of Iranian barrels and higher US supply will weigh on balances.
Edited Excerpts:
Q What are the factors that will drive India’s oil demand growth to 485,000 b/d in 2021?
S&P Global Platts Analytics has recently revised India’s oil demand growth in 2021 to 440,000 b/d. We believe constructive economic indicators and expansionary budget along with healthy vehicle sales will support this year’s oil demand growth in India. It should be mentioned that it is a rebound from a sharp contraction of 470,000 b/d in 2020.
Q Despite the three factors mentioned above, do you see rising oil prices dampening your demand forecast?
We have already lowered our growth outlook for India’s oil demand to 440,000 b/d this year, not just because of high fuel prices, but also due to rising daily cases of COVID-19 in the country, with localised lockdown measures being re-imposed in some areas.
Q What is the impact of surging dollar and bond yields on crude prices? Tell us in the context of India.
I would not use the term “surging” to describe the movement of the dollar. It had weakened about 12.5% from the March (20) 2020 high, to the early Jan (5) 2021 low. It then strengthened about 4%. Similarly, bond yields have pushed higher, but are still considered historically low.
Dollar strength in itself, is not a huge headwind for India. What is more important is the price of crude oil and imported gas, and the trends in those. More importantly, the strength of dollar and oil prices are determined by their own, often different fundamentals and related factors.
Having said that, a stronger dollar tends to counter a rising trend in oil prices, so in that sense, the two factors work against each other. A much weaker dollar will tend to lower the imported costs of oil and natural gas in India when viewed in local currency, which takes some of the sting out of higher prices if they are in fact moving up. Having said that, a stronger dollar will raise imported fuel costs in rupees, but the global dollar price may, in fact, be easing.
Q Do you see oil prices crashing post the follow-on Saudi Aramco issue?
Oil prices are determined by the balances or imbalances of supply and demand with day-to-day changes also affected by the sentiment of the financial market. How the company performs would affect the share price of the company and the revenue it generates for the country.
Saudi Arabia has greater interest in stabilising oil markets than just the Aramco offerings. Its budget remains sensitive to oil prices, and it strives for stability within global markets. Going forward, Saudi Arabia aims to diversify its economy from oil over the coming years.
Q Abu Dhabi's flagship Murban crude was launched on March 29. What impact will the same have on the overall crude market?
The launch of a Murban futures contract provide diversified trading opportunities amid other existing benchmarks. The destination-free Murban is not only welcomed by Asian buyers such as Japan, Thailand, India and South Korea, which bought roughly 70% of Murban in 2020, but it will also be potentially competitive within the Atlantic Basin.
In the longer term, the Murban futures launch will likely increase connectivity of crudes between East of Suez and Atlantic Basin in the wake of a MoU signed by ICE and oil majors to explore the use of Murban futures to export US barrels to Asia last year. We also believe the Middle East will likely add some strategic optionality to move their oil barrels in both directions between East of Suez and Atlantic Basin to expand market share while capturing the margin based on relevant prices.
The improved infrastructure connecting the Mediterranean Sea and Red Sea will make that option more feasible in the wake of restored ties between UAE and Israel last year, and several follow-up agreements to expand pipelines and storage capacities.
Q The recent surge in COVID cases in Europe and other parts of the globe is acting as a dampener for crude oil recovery. Do you see it as temporary, with things improving in H2 2021?
We take note of the rise in COVID cases around the world, in certain countries and within countries. Having said that, simply the COVID trends by themselves, are not of itself sufficient to significantly alter the recovery paths, unless lockdowns and restrictions are re-imposed.
We are assuming vaccination deployment will eventually bring the spread of coronavirus under better control and the global economy will improve in H2 2021, though that is not guaranteed by a long shot.
Q Do you see OPEC+ maintain output cuts/increase in the near future given the precarious finance of both OPEC and non-OPEC nations?
The key aim of OPEC+ is to bring global oil inventories back to normal levels by reducing supply. In doing so, prices have improved, which are beneficial for all participants. Global oil supply continues to be driven by Saudi Arabia’s production strategy. At the March 4 OPEC+ meeting, Saudi Arabia pointed to an uncertain demand recovery and stressed the need to remain cautious. In line with this view, it extended the 1 million b/d unilateral cut through April (at least) and pledged to bring back supply “gradually” as demand recovery materialises.
Since then COVID-19 cases have surged in several parts of the world including EU, India, and Brazil and oil prices have retreated from mid-March highs. Given this backdrop for the April 1st OPEC+ meeting, we expect the Saudis to extend their unilateral cut again and OPEC+ to roll over most of its April quota for May (with some concessions to Russia and Kazakhstan). Going forward as supply starts to come back from Iran and the US, it may become more difficult for them to balance the market, but our balances indicate demand growth will be sufficient to accommodate both, at least through 2021.
Q A lot of countries are moving towards renewable sources for their energy needs. Do you see the current decade being the last boom in crude oil as some analysts are predicting?
Each end use will have its own dynamic. Jet fuel consumption has a high degree of momentum, subject to normalisation pace of air travel coming out of COVID. Higher engine efficiencies will continue to eat at consumption at the margin, but it should not offset the general rise in aviation. Road fuel consumption is a bit more nuanced. Electric vehicles will make significant inroads, at the margin, but there are a lot of considerations with regard to turning over the capital stock in big developed countries, like US and Europe, and Japan, while in developing countries, the costs of such vehicles and ability to purchase such vehicles remain a consideration.
The oil product use for power generation while it might present opportunities for substitution, still represents a significant amount of capacity already in place, on the ground. Such retirement of that capacity will take time.
Lastly, oil product use in seaborne trade will be a supporting consumptive use, but again, there are substitution possibilities from natural gas, or natural gas derivatives (ammonia). Even so, again, turning over a capital stock of ships, takes time, while shippers have already gone through a significant outlay for IMO 2020, so another big capital outlay for “green fuel” shipping, is not likely to be embraced quickly.
Overall, the demand for fossil fuels will be around for many years to come and oil demand will only peak around 2040. Oil demand growth will increasingly be for petrochemicals as fuel demand slows/declines. By 2050 oil refining volumes may fall by as much as a third as investors and governments around the world pursue a faster pace of energy transition to combat global warming.
Q Does India miss the bus to take advantage of lower crude oil by hedging a part of it.
India did take the opportunity to fill up the remaining tanks of its SPR when oil prices plunged back in early 2020, so it has benefited from lower oil prices.
Q What is your outlook on crude prices in H1 and H2 2021?
Global oil stocks remained relatively stable and above normal in Q1 2021. However, with Q2 output likely to see less growth as a result of the OPEC agreement, balances will tighten earlier and through Q3 as demand increases. But by Q4, the likely return of Iranian barrels and higher US supply will weigh on balances. Overall, we expect Dated Brent prices to get supported to rise by June/July before easing up toward the end of the year on the back of additional supplies from Iran, the US and some OPEC+ member countries.
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