Oil buyers looking for cheap crude and finding it
Increased competition threatens plans of OPEC+ for price recovery
The last five years have been tough for big oil companies due to falling prices and unstable demand, but for key crude importers, the situation has been completely different. Collapsing prices allowed them to replenish their stocks with cheap crude, and this new habit is a problem for the world’s largest oil-producing cartel.
Deeply discounted crude is becoming a headache for OPEC, says OilPrice.com. Oil prices are currently at a much more comfortable level compared to 2020 ago thanks to OPEC+ output cut policy, but buyers have already got hooked on cheap oil, so they are looking for discounts and finding them. For example, oil featured prominently in a recent long-term investment deal between China and Iran. The latter is selling its oil cheaply, as Tehran can find very few buyers while it is still under US sanctions.
According to Reuters, rising Iranian oil imports into China has forced other producers, including Russia, Angola and Brazil, to cut the prices of their crude to keep it competitive. “These ‘sensitive’ barrels are hammering supplies from everywhere, as they are simply too cheap,” said an anonymous Chinese trader referring to Iranian oil.
Meanwhile, Saudi Arabia took a controversial step at the beginning of the month saying it would raise oil prices for Asian buyers. India, which imports more than 80% of the oil it consumes, immediately started diversifying. After Riyadh announced a hike of $0,40, India’s top four refiners cut their May orders for Saudi oil by 36%. According to local media, Indian Oil Corporation is going to buy an oil cargo from Guyana in line with oil supply diversification plans.
Fortunately for oil buyers, there is still a glut of crude in the market, and suppliers need to sell oil more than buyers need to buy it. Things may change if consumption rebounds after the pandemic recedes, but currently, the demand outlook remains uncertain. The most recent OPEC and International Energy Agency demand forecasts expect a strong rebound in oil demand this year fuelled by vaccination and government stimulus. However, earlier bullish forecasts haven’t materialised. New COVID-19 infection numbers are on the rise, and stimulus won’t last forever. Nobody knows at the moment how long demand will remain subdued. At the same time, supplier competition provides large oil consumers with the luxury of picking and choosing, says OilPrice.com. Growing competition may even lead to a new price war and another price collapse, which would harden China and India’s cheap oil habits.