Behind the Scenes in Oil and Gas

Today, I want to shed some light on the intricate world of oil and gas. With numerous misconceptions about the oil market circulating in public discourse, it’s time to uncover the truth and debunk the myths regarding the economic implications of oil activity. First, let’s address the difficulty in using oil consumption as a reliable indicator of global economic activity.

The Deterioration of Data Quality

We’re experiencing a serious deterioration in the data quality from some major oil producers currently under economic sanctions from Western countries. These include Russia, Iran, and Venezuela. The reality, though, is that oil sanctions aren’t entirely effective; the oil still finds its way to the market, no matter the circumstances. If Iran or Russia offer oil at a discounted price to a buyer like India, it would be too tempting to refuse. With nearly 190 countries across the globe, there will always be a market for this oil.

The Shift in the Asian Oil Markets

Recent market changes have drastically shaken up the Asian oil markets, leading to increased prices for medium sour crude. New refineries in Kuwait and Oman, designed for medium sour crude, have reduced the availability for the rest of the Asian market. Coupled with Mexico reducing its exports of the same by 400,000 barrels a day since the beginning of the year, these supply changes have driven the price up. Many misconceptions attribute this increase to higher demand, but it is primarily due to demand driven by a structural change in the global refining system.

Predictions for Global Oil Demand

Forecasts from OPEC and the International Energy Agency suggest that 2025 will be a record year for global oil demand. These predictions range from an additional 1.1 million to 2.2 million barrels a day of global demand – a significant variation. Most agree that the increase will be approximately 1.48 million barrels per day. However, it’s important to emphasize that this shift does not imply economic health, but rather reflects the developing nations’ demand increase as people transition from bicycles to scooters and from scooters to cars.

Saudi Arabia and Its Approach to Oil Production

This year, with the US election imminent, the Biden administration asked Saudi Arabia to increase oil production. Interestingly, the Saudis, aware of their high inventories, refused the request. Saudi Arabia’s strategy stems from its low-cost conventional oil production, which they want to save for selling at a higher price in the future. As sustainable energy investments also become a priority in Saudi Arabia, their need for increased oil production might not even rise, bringing more oil and gas into the global market without expanding capacity.

Looking Towards the Future

With the next OPEC meeting at the end of this week, there is anticipation for some significant announcements. Recent OPEC press releases have introduced a new term – the Declaration of Cooperation (DOC) – extending cooperation to non-OPEC members. This shift suggests the possibility of global oil trading outside the US dollar, potentially decreasing the value of US treasuries. While this is speculative, the reasons behind China’s recent massive sale of US treasuries could be linked to this anticipation.

There are many moving elements, literally and figuratively, in the world of oil and gas. As we navigate through these complexities, let’s continue to strive to understand the undercurrents shaping our global economy.

Now, go forth and make some great things happen. Till next time.