Consuming nations are gaining the upper hand in oil markets

Major oil-consuming nations seem to have gained some leverage in a market full of uncertainties

Rashid Husain SyedAs 2021 winds down, oil markets face uncertainties. Omicron has begun to change crude demand perceptions. Economies – especially in Europe – are beginning to stutter, and Canada is also under pressure, with increasing restrictions in place.

All this will impact crude oil consumption in the months to come.

There’s no unanimity among experts on the prospects for the oil markets over the coming months. Many expect the market to be significantly oversupplied in the first half of 2022. But you can’t write off those who continue to insist that underinvestment in the oil sector could result in producers falling significantly short of global demand.

In recent months, crude oversupply has been one of the main talking points in oil markets. That moment may soon be upon us, predicts Tom Kool in his piece in Oilprice.com.

Besides the COVID-19 Omicron variant, other factors seem to be in play.

China, the world’s largest crude importer, has shown recent signs of softening demand. China’s strict anti-COVID measures, and its continued clampdown on independent refiners in Shandong, have curbed the enthusiasm of market bulls, Kool stressed.

All this will slow crude oil delivery to the world’s top oil-importing nation early next year, industry consultants tell Bloomberg. Chinese imports in March 2022 will be around 10.7 million barrels per day (bpd), about one million bpd lower than the crude imports in March 2021, according to estimates from consultants FGE.

China has also reportedly ramped up its purchases of cheap Iranian crude. The clandestine flow of crude from Iran continues to inch up, despite the United States sanctions.

Market intelligence firm Kpler reported that China imported almost 18 million barrels in November, equivalent to about 600,000 barrels a day. That’s up nearly 40 per cent from its October imports from Iran and the biggest volume since August. China reportedly ramped up its buying of cheap Iranian crude last month after independent refiners were granted additional import quotas for 2021. Traders say Iranian cargoes were sold at a discount of at least $4 a barrel to the ICE Brent price.

The import figures from Kpler are at odds with official Chinese data, which indicate the nation hasn’t taken Iranian oil since December 2020. But supplies from Iran to China have often been rebranded as originating from Oman and Malaysia.

So Asian refiners, including those in China, aren’t rushing to buy too much crude in the coming months. Higher Saudi prices for January, lower overall demand for crude amid the Omicron uncertainty, the Chinese crackdown on illicit practices at its independent refiners, and refinery maintenance season starting late in the first quarter of 2022 have resulted in Asian refiners abstaining from extra Saudi crude supply for loading in January, media reported last week.

Click here to downloadIn the meantime, oil markets are in for major structural adjustments. In early December, just before the virtual ministerial meeting of the Organization of Petroleum Exporting Countries and its allies in OPEC+, many observers said that due to the impact of Omicron, the producers’ group might not go ahead with its scheduled additional output increment of 400,000 bpd.

But OPEC+ surprised the markets by announcing it would increase its output, despite possible market oversupply. Many felt the decision had political connotations, with OPEC+, especially kingpin Saudi Arabia, not wanting to annoy the United States. De facto Saudi ruler Crown Prince Mohammad bin Salman desperately needs U.S. support.

The output increase also indicated the growing influence of consumers in the current market. OPEC+ chose not to freeze production quotas because it fears angering the main oil-importing countries, Nikolay Kozhanov wrote in Al Jazeera. This puts the spotlight on the new, emerging realities and changing dynamics of global hydrocarbon markets.

For several reasons, including a rush among the producers to cash in on the assets beneath the surface before it’s too late, the baton in the ongoing crude game seems to be gradually being passed to the consumers.

Another major crude transition is underway.

Toronto-based Rashid Husain Syed is a respected energy and political analyst, with the Middle East as his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.


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