In fact, when prices were cut on March 15 in the run-up to the election, the announcement was made by the petroleum ministry, which cited a decision by the oil marketing companies to such effect. But price increases are announced directly by the oil companies. The government’s open market policy would have sounded more credible if the new prices, which must be on their way, came when there is no effective government in place. But that was not to be. So the unseen nexus is clear.

While the government maintains it is not manipulating prices, the reality is exactly the opposite. Data suggests a curious but clear correlation between price hikes and election cycles as well as the post-election responses by both the companies and the government. The reasoning for post-election price hikes is almost predictable: the financial burden shouldered by oil companies during periods of price stability despite rising international oil prices has to be taken care of through appropriate price revisions.

Luckily for the consumers, global oil prices currently are in rather congenial circumstances despite an arbitrary move by the producers’ cartel to curb output and step up pressure on prices. The gambit, however, has not worked so far. Brent crude futures are hovering below $80 per barrel after dropping to the lowest level in four months after the OPEC+ announcement of further output cuts on 2 June. This is probably more driven by the bearishness on the product market side and the fear of a demand misfire triggering cuts in refinery runs cut and lower crude demand.

Analysts do not rule out a brief spurt in prices, but with limited upside. According to Rystad Energy, the decline in the price can be attributed to apprehensions regarding the demand for gasoline and diesel triggered refinery run cuts. Their signal is that the price could see an upturn towards the $85 mark in the near future. Rystad had rightly predicted the extension of the price cut to the third quarter of 2024 despite the temptation of projection of good growth in oil demand and refinery runs during that period. They had also pointed out that OPEC+ is likely to keep an eye on the unexplained 1+ million barrels per day surplus in the balances thus far; and that bearish fourth-quarter fundamentals are unlikely to provide support to unwind cuts in the near term.

Not only has the outright price level corrected, but there is also a significant and more worrying correction in time spreads from a OPEC+ strategy angle. Dubai time spreads till month four have dropped to the lowest levels near $0.50 per barrel from a high of $1.0 per barrel in early April. The correction in Brent time spreads is much higher, dropping from $1.0 per barrel in early April to near $0.20-$0.30 per barrel.

Rystad’s latest estimates after the OPEC+ decision show a deficit of 2.7 million bpd on average in third-quarter liquids balances, with a high of 3.2 million bpd in the peak month of September. Fourth-quarter liquids balances signal a deficit of 2 million bpd. However, the supply and demand balances on absolute reported levels may indicate a deficit but calculating the delta changes in fundamentals since pandemic low levels to now, the signal is that the sum total of crude runs and exports from OPEC+ is higher than production by 1.2 million bpd.

By applying a 50 percent uncertainty and adding 600,000 bpd of unexplained supply to the balances, the deficit projection shrinks to 2.1 million bpd in the third quarter of 2024 and to 1.4 million bpd in the fourth quarter. With respect to crude, third-quarter crude balances show deficits of 2.2 million bpd on average, with a high of 2.4 million bpd in the peak month of August. Fourth-quarter balances signal a deficit of 1 million bpd.

The development of pricing by factoring in the adjusted supply-demand balance, bond yields and risk premium brings the latest price forecast for the third quarter to $77 and to $83 for the fourth quarter.

The previous pricing outlook indicated a higher price level without the unexplained surplus adjustment.

Apart from examining the impact of OPEC+ on global balances, the oil and crude demand profiles of key OPEC buyers suggest that the current bearishness may be mispriced. Most OPEC+ exports are exposed to a limited number of key Asia-Pacific countries without significant diversification options. (IPA Service)