Oil demand in emerging markets will moderate: Platts

A: Right now it does seem very bearish. I can see very few factors on the horizon that might stem the fall, let alone send prices moving up again because some of the fundamentals that have been responsible for pushing prices down since mid year are only getting more exaggerated coming even more into greater focus.

We saw for instance yesterday apart from Naimi’s comments, digging in his heels about not cutting.

At the same time OPEC also came out with its projections for next year the demand on its oil, it said will be 28.9 million barrels/day and contrast that with the group’s decision to keep output at 30 and the actual output will actually be even more than 30 million barrels/day.

So OPEC clearly admitting that there is going to be more than 1 million barrels/day of oil production from that group alone. Not to mention US may likely add another 700,000-800,000 barrels/day and pitted against this is the increasingly bleak demand scenario.

Demand even in centres like China, India, the emerging economy looks like it is going to start moderating hugely even if not collapsing, so overall a bearish scenario. There is always the unanticipated geopolitical factor. So if there is a major outage which is still a possibility, I won’t rule it out in places like Libya, Nigeria.

To my mind that is the only thing that might put an immediate bottom right now. Otherwise it will continue to drift lower till it finds the balancing point.

Q: What according to you will be the price at which crude can potentially stabilise?

A: Instead of trying to focus on a number which is proving even the most experienced of market watchers wrong I am tending to focus my attention on what signs are we seeing that might restore the balance. So that might put a floor on the prices.

Are we seeing any production cuts happening? The straight answer for that is no, not yet. So, that is what I will really be looking for.

Until a few weeks ago I was also looking for signs of recovering demand, especially in the emerging economies that are still doing well like China and India. But now I am not that optimistic on it because Chinese demand has come up just 2 percent year-on-year (YoY) for the first 22 months of the year and a lot of other signs that next year Chinese economy might face even greater headwinds. I won’t hold my breath for any major increase in Chinese oil demand next year either. The same goes for India.

Russian demand has been holding up remarkably but I am very pessimistic about that as well given the state of Russian economy that demand might also go down next year and then we have all the Latin American countries in fresh economic trouble as well. So, it really doesn’t look like a good picture on the demand side.

What I will really be looking out for now is any indication of either companies telling us directly or any indication that they are starting to cut back production, not spending on new production because that is already happening but is there any reduction in output that is happening.

Q: Do you think there is a likelihood that OPEC may consider revising or at least reviewing their decision before their next meeting which is in June?

A: Of course a lot of attention being focussed on that as well because given OPEC’s history and well documented move to control and try and balance market prices it is natural for the market participants to look at OPEC and expect them to do something.

There also seems to be a lot of dissonance within OPEC itself, obviously OPEC members like Venezuela and Iran were very much in favour of the cartel and reducing its production but the Saudi seems to have taken and their decision really holds. They seems to have taken a completely opposite stance.

There seems to be some rumbling within the organisation as well. I can see some of the pronouncements coming out from the Saudi Oil Minister Naimi as well.

I would be very surprised if they reverse the course that they have taken and say, okay now we will do something that argument is just too compelling, why should OPEC cut if they cut prices recover and then the US oil production comes back to the market.

Why should they suffer in order for somebody else somewhere to benefit from the recovery in oil prices. I don’t think that is going to happen but time will tell.

Q: At what price does US shale production become unviable for them?

A: It is a whole range of prices. The other argument that you need to keep in mind, I know USD 60-65/barrel is a number that has been circulated the most but what you need to keep in mind is the staying power of the company. So it is not just oil in the US but oil prices have fallen way below what some of the OPEC producers want as well. What really comes into play now are not just the breakeven cost of production but the fiscal breakeven price and the staying power.

Some of the companies in the US that are producing tight oil are hedged for instance for 2015. So they might be in a far better condition to weather this period of low oil prices. As a result, it might be a while before we actually see the impact of the current low prices translating into any reduction in the US production. It might even happen beyond 2015 for all we know.