Oil - only few safety valves left: IIFL Securities

15 Jun 2022 , 10:57 AM

IIFL Securities hosted a webinar with Vandana Hari (Founder & CEO of Vanda Insights) during which she shared her insights on the demand-supply mismatch, global scenarios affecting oil markets and the future trend of oil prices.
Presented below is a synopsis of the discussion:

1. Demand for oil is growing at a time when the EU is unwilling to offtake 2mbpd oil and 1.5mbpd products from Russia, and the OPEC − clubbed with US shale operators − is showing no interest in ramping-up production. The markets are undersupplied by ~2.5mbpd and possible outages from Russia will further worsen the situation.
2. Brent’s new trading range (US$115-120/bbl) partially reflects such tight market dynamics; incremental outages (e.g. unrest in African countries, hurricane in USA, etc) will trigger a runaway increase in oil & product prices. As such, there are no relief valves to offset such disruptions.
3. Russian oil wells may face technical issues to ramp up production, if any cuts are introduced. So it is negotiating with countries like India to sell oil through term deals, where pricing will play a pivotal role. If it negotiates prudently, India stands to benefit materially, even though logistical costs are relatively higher.
4. Although China has surplus refining capacity, it is unwilling to step up operating rates to rein its carbon footprint and marginalize teapot refiners.
5. Against this backdrop, meaningful correction in oil/product prices is likely if the war ends soon (a low possibility event) or a spike in inflation leads to cut in consumer spends, thereby triggering a fall in demand. As of now, there are no visible signs of either.