The three pillars that support oil markets: availability, affordably and sustainability!

 

India: energy facts
India: energy facts

At present, the speculations run rife in the energy markets about the next move by Saudi Arabia and Russia in the face of falling oil prices. 

Every oil analyst ponders the thought - and inevitable consequences - of yet another production cut by some oil producers in order to shore up the prices, despite the possibility of  every member of the OPEC+ being on the wavelength remains low.

To this day, however, the two bigwigs of the OPEC+ appeared to have chosen to be tightlipped about their next move.

Saudi Arabia and Russia unilaterally embarked on a production cut of 1.5 million bpd - barrels per day - despite the protests from the consumer nations. Even the world's largest oil producer, the US, was not pleased with the move, but equally helpless to reverse it or at least make a dent on it.

Both Saudi Arabia and Russia have already confirmed the production cuts will remain through December, leaving the scenario beyond that a closely-guarded secret.

As of 10:14 GMT, the prices of WTI - West Texas Intermediate - and Brent were trading at $77.13 and $81.82 respectively. 


As for Saudi Arabia, this is not what they anticipated, when their break-even price, based on the estimates of the IMF, International Monetary Fund, is just over $80. If the prices remain at this level, funding their gigantic, ambitious projects such as the NEOM that claims to revolutionize the urban living will be challenging, if not in jeopardy.  

In theory, a production cut that is equivalent to supply cut, leads to a rise in price. In a market where the prices oscillate on the fulcrum of sentiment, the price of oil did go up when the announcement grabbed the headline - in line with the basic economics.

It's not rocket science, however, to anticipate what comes next: the lower the production, the greater the fall in revenue you earn from the very commodity.

Aramco, the main oil company in Saudi Arabia, announced that their profit in the third quarter, Q3, has gone down by 23%; the corresponding losses for the Q1 and Q2 were equally significant.

Falling profits of Saudi Aramco
Falling profits of Saudi Aramco


It is highly likely that Saudi Arabia and Russia may extend the production cuts beyond December despite the palpable apprehension of the consumers. 

India, the word's third largest oil importer, meanwhile, highlighted the importance of the crude oil markets being well-supplied for the stability on many fronts - not necessarily on the economic front.

Hardeep Singh Puri, the Indian oil minister, for instance, emphasized the need of maintaining market stability for the benefit of the consumers, producers and global economy.

At the 6th India-OPEC dialogue that took place in Vienna, Austria, on November 6, Mr Puri highlighted his concerns over the pressing issue, especially from consumers' point of view. 

The discussions revolved around the combined axis of availability, affordability, and of course, sustainability. Judging by the optics of the meeting, it appeared to be a productive discussion.

In the meeting, Mr Puri appealed to the producers to take constructive steps to strengthen the three pillars for the sake of the global economy - and simultaneously. 

The role of India has been hailed as pragmatic in the discussion, as it, quite rightly, took into account the plight of producers in the event of prices falling far below the sustainable level, as happened during the Covid-19 pandemic; on April 20 2020, the price of oil went negative for the first time ever, with WTI recording a price, -$37.63!

Although the markets welcome the potential arrival of Venezuelan oil, it has been countered by the harsher sanctions on the Iranian oil; the US is hell bent on targeting the ports that offload Iranian oil, something that the former turned a blind eye on before, despite the Western sanctions being in place - for obvious reasons.

With the SPR - Strategic Petroleum Reserve - of the US at a historic low, the US is helpless in controlling the price of oil, if it rises again.

Anticipating the worst-case scenario, the US appeared to have turned to Venezuela, its old nemesis, as the last resort to boost the supply, having tried the same with Iran for months while trying to revive the 2015 nuclear deal, known as the JCPOA, but in vain.

Oil prices are stable at present, not thanks to the boost of production by the Latin American nation, but due to the falling demand that has stemmed from far-from-rosy global economic outlook. 

Falling oil prices - www.oilfutures.co.uk
Falling oil prices - www.oilfutures.co.uk

In this context, if Saudi Arabia - and Russia for that matter - embark stubbornly on yet another production cut, the consequences will be disastrous for the global economy. 

A move of that kind will not strengthen the three pillars that they discussed at India-OPEC summit recently. On the contrary, it has the potential to trigger off a jolt on all three pillars simultaneously without much effort. 





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