Opec may slow down on easing output cut: Hari | Economic Times

The timing of the Biden administration asking Opec to increase output was a bit curious. If anything, Opec Plus will now be inclined to look at the opposite direction, especially having seen the IEA’s report, says Vandana Hari, Founder, Vanda Insights. What could be the thinking behind lowering the second half oil demand forecast? Is it because of the rise in the Delta variant cases?The downgrade in demand, especially for the second half of this year, should not come as a surprise. Perhaps I was a little bit surprised by the US energy information administration which came out with this monthly report earlier this week and maintained the forecast. Compared with last month, things have changed quite substantially because of the Delta wave, especially in the US and China. Here we are looking at the world’s two largest economies and consumers. Put together, these two countries, at 20 and 15 million barrels per day, account for nearly 36% of total global oil consumption. So while the US case right now is more of a fear, it is not a worry because the country has been fully reopened through May and June and has not really re-imposed any restrictions on mobility or on businesses. But the situation in China is quite different though the case count is relatively low by any standards, less than 100 cases per day nationwide. But that country has had a zero Covid policy since pretty much the start of the pandemic and over the past couple of weeks, we have seen quite stringent restrictions. They are very localised but nonetheless some are more widespread like banning or curtailing non-essential travel. So when you look at China and nearly 15 million barrels per day of oil consumption with more than half the country now reporting Covid cases and imposing restrictions, it is natural to expect a drop in demand. To what extent the demand will drop in China is a bit of a question mark to my mind. What implications does this move by IEA have on oil prices?I think it leaves the market rather confused for the time being and the markets have been quite confused even the past couple of weeks. In theory it is bad for demand when Covid is surging and a third wave is coming on a global level. It has especially been surging in the US with outbreaks in China, but the market has been rather confused because everything that we used last year, the correlations between a rise in cases and hospitalisation, deaths and policy response, have broken down. This year, all vaccinated countries are far more reassured. We see the same thing in Europe. There is a Delta wave in European countries as well but we do not see governments -- especially in well vaccinated countries -- responding the same way with restrictions like they did last year. When it comes to China, again it is completely a case by itself. There the leaders are saying that they are confident of stamping out the latest outbreaks in a matter of two to three weeks and given China and how its policies work and are implemented, that might be entirely possible. So we might see this whole fear evaporating very quickly. In the US, of course, mobility is down a little bit but again there are no government imposed restrictions. Mobility has been generally higher in the summer season and it is not coming down. All of this leaves the market in a rather very challenging situation. It is a state of flux. Countries are changing their approach to controlling Covid and Covid itself is changing in form and shape and how it affects and impacts the population. So really hard to say at this point. But we have come off 7-8% from the 32-month highs that we saw in Brent and WTI last month. The downward pressure will sustain for some time and this time, the demand bump is behind us. Now we have to brace for autumn and winter and see what that brings, especially in the northern hemisphere because that is the flu season in those countries. The downward pressure is likely to continue. Overnight US President Joe Biden is calling for lower rates as far as oil goes and appealing to OPEC Plus to boost production. There is pressure coming in from renewables and the shift towards EVs as well?Yes. I would put renewables in a slightly different basket. It is not just renewables but generally a pressure is coming on the fossil fuel industry to decarbonise and that will remain and continue to accelerate. But I see that playing out in a longer term period, 10-15-20 years from now. But just talking about the short term and you mentioned the US White House. I thought the timing of the Biden administration asking Opec to increase output was a bit curious. If anything, Opec Plus will now be inclined to look at the opposite direction, especially having seen the IEA’s report. We have to see what Opec itself says in its monthly report. But worries right now have shifted, they are not about not getting enough supply, but there could be oversupply, if demand through Q3 does not pan out as expected because of this Delta wave. Opec is continuing to release 400,000 barrels a day of additional oil each month starting August. Opec is likely to be looking in the other direction. It has been very cautious so far and they will probably think it is time to slow down on the easing. So I do not really expect Opec to pay much heed to the White House request to pump more. Also the tone is very different. It is no longer Donald Trump in the White House. It is probably going to be contemplating something very different.