Ross Greenwood speaks to Founder of Vanda Insights, Vandana Hari, who explains why prices are declining.
Introduction: Will petrol prices continue to drop?
Ross Greenwood: Now, I did mention earlier– Actually, as we going into this, let’s go to Mathew in Kareela. He can probably help us out here. Matthew, just having a look at oil prices, petrol price around the place. What have you seen fuel prices doing?
Mathew: I have seen that the unleaded prices go down quite significantly, which is always positive to see but being a diesel owner, the diesel price seems to be quite stable, seems to be still quite high. Especially after you compare from about a year ago or so, when it was $1.20, $1.30 on average. Any reason why that might be, Ross?
Ross Greenwood: Well, I’d suggest it’s because of the industrial applications. Mining is going okay at the moment, the economy is going okay. As a result, you’ve suddenly got a situation where probably those diesel prices are not as influenced by the global oil price. I’ll tell you somebody who does know the answer to all of that. Vandana Hari is with Vanda Insights, who’s one of the leading oil analysts in the world. She’s on the line right now. Vandana, always great to have you on the program. Thank you so much.
Interview with: Vandara Hari, Founder, Vanda Insights
Vandana Hari: Great to be back, Ross. Thanks for having me.
Ross Greenwood: This goes all the way back to, well, September, October when the sanctions were coming on to Iran. Iran is a major supplier of oil on the world markets. As a result of the expected shortfall from Iran, the prices went through the roof. Since then, the gap’s been filled and this is the reason why they’ve fallen so vigorously during October, isn’t it?
Vandana Hari: It has caught a lot of people by surprise and definitely the oil bulls that were calling for $90 and $100. If you remember not so long ago, towards the end of September, it caught them on the back foot as well. A few things that have turned out to be somewhat surprising and unexpected. This has been especially something that emerged, I would say, the second week of October, right around the time we saw a lot of financial turmoil in the financial markets as well, was very real worries over demand growth that have gripped the oil markets.
Now, it’s not yet visible in data. It’s not something that you can put your finger on and say, “Yes, I know oil demand is going to grow by this much in 2019, which has been so much less than it was in 2018.” Nobody can really say. Everybody is just doing their best guess. The assumption right now because of the financial stress, fiscal stress, fiscal deficits in the emerging market economies. Not to mention a Chinese slowdown that is happening as a result of the tariff war. The assumption is that oil demand will grow. It will certainly grow in 2019 but much less than 2018. That’s one reason.
The second, the supplies have been remarkably abundant. OPEC and Russia put back onto the market much more than the one million barrels per day that they had pledged in June. It’s almost 1.6 million barrels per day according to my calculations that they managed to add by October. Enough supply, concerns over demand, and then not to forget the US, again, somewhat unexpectedly granted waivers to eight countries. They will have to cut back the Iranian imports but nonetheless, it’s a far cry from the rhetoric we had heard in recent months from the US, that they wanted to see Iran’s exports go down to zero. Overall, the market feel there’s plenty of supply and perhaps not enough demand growth.
Ross Greenwood: One thing I also heard was that there might even be the prospect, with the United States having granted these waivers, to produce more oil in these various countries, but also even the United States now being a bigger oil producer than Russia and/or Saudi Arabia, that it may very well be a case that Saudi Arabia at some stage, as part of the OPEC membership, starts to try and cut back the daily supply of oil onto the market. They’re fearful now of an overreaction and actually prices coming down even further than what many anticipated.
Vandana Hari: Absolutely. If you look at the US production, what a turnaround. In less than a decade, today US is the biggest producer of oil globally. It’s bigger than Russia. Russia is number two and Saudi Arabia is number three. Now, the big distinction however, between the US, and Saudi and Russia on the other hand, is in the US, these are independent producers. Of course, global oil majors producing there as well but lots of independent producers in the shale area, which is showing the strongest growth. They’re going to produce. If it makes economic sense for them, they will produce, which is what the shale phenomenon we’re seeing in the US.
The US predicting it will cross 12 million barrels per day of production next year. An amount no country has produced ever before. That is happening. OPEC and Saudi Arabia and Russia, on the other hand, have also been pumping more but they are following a very different strategy. OPEC, of course, Saudi is the leader of OPEC, and Russia as a collaborator of the non-OPEC block that have been working with OPEC since last year. They are indeed looking to cut back. Russia maybe not. The Russian energy minister over the weekend said he wasn’t sure if OPEC should be doing so many 180-degree turns, I believe that’s the phrase he used, so quickly.
It does look like the Saudis and some of their peers within OPEC are looking to cut back again. They don’t like, I believe, not that they said it, I don’t think they wanted Brent to go below $70.
Ross Greenwood: Now, it’s going to be interesting to watch it. Vandana Hari, as I say, one of the foremost oil analysts and observers in the world, just looking at the geopolitical side of that. Vandana, as always, we appreciate your time here on the program.
Image source: 2GB