OPEC is back in control but needs to avoid scoring an own goal

OPEC is back in control of oil markets but it will need to stop squabbling if it wants to avoid scoring a spectacular own goal. A spat in recent days between Saudi Arabia and the UAE threatened to undo the cartel’s hard won gains of the past 18 months as it struggled to rebalance global oil markets. 

The two countries failed to agree on how to increase supply. It will take touch and composure to safeguard the post-pandemic oil market recovery. And care will be needed to avoid stoking inflationary pressures - particularly in nervous consuming nations. 

The cartel will find itself quickly thrust back into the spotlight if it fails to keep a lid on prices. But opening the taps too wide may defer important decisions needed to address climate change.

The group met last week but abandoned talks and set no new date to resume them. It is unlikely the impasse will last for long but any uncertainty will unsettle oil markets that have only recently become balanced. Signal Ocean data for Very Large Crude Carriers (VLCC) traffic suggests key tanker routes are operating smoothly and responding to growing oil demand.

The group has been in tight spots before and usually finds a way out. But this time feels different. The world is more connected but it is also more unpredictable. And the challenges are more urgent. In particular, the economic recovery has been bumpy with some countries and industries rallying back quickly while others lag or are trying to restructure. And the asymmetric impact of changes relating to climate change are beginning to bite.

OPEC is a naturally shy organisation. But it will increasingly need to recognise - and participate - in the wider context within which it now operates. Global inflationary pressures are being watched closely and it remains unclear whether the underlying trend is upwards or whether it will be a temporary blip.

Signal Ocean data show the recovery in oil demand is continuing as industries around the world rebound and also refill supply chains depleted last summer at the height of the pandemic. Long haul air travel and demand for jet fuel continues to lag the overall recovery but this has been offset by demand for diesel and gasoline as regional and local travel accelerates.

The data for VLCC (Very Large Crude Carrier) traffic suggests key routes from the Arabian Gulf and Africa to Eastern destinations are growing steadily again after a dip in the spring months. The chart below shows the average TonMiles (see below for Methodology) for the routes to China, India, Singapore, Vietnam, Malaysia, Thailand, Korea, Japan, Pakistan, the Philippines and Australia. Note: 

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The market for VLCCs sailing from the Arabian Gulf to the East seems to be functioning smoothly. Tanker supply is beginning to show some stability according to Signal Ocean data. There are over 30 vessels available for loading in the Arabian Gulf to go East. This is near the upper end of the range for the past 90 days and is for tankers arriving within 20 days. The data uses Ras Tanura as the reference loading port. Meanwhile, tanker fixture rates are hovering near 31 WorldScale which is near the low end of the same 90 day range. Oil traders should have little difficulty chartering prompt vessels at reasonable prices, according to the data.

Also, port congestion in China appears to have moderated over the past year suggesting that any previous bottlenecks and disruptions caused by the pandemic are beginning to be resolved. The number of VLCCs waiting has fallen to around 32 this month compared to 55 last September. 

Collectively, different Signal Ocean data suggests the key oil trading routes are beginning to normalise as Asian economies recover and stabilise. However, the wider context remains fragile. Central bankers remain uncertain about whether the current inflationary uptick is temporary. If they get spooked into raising interest rates too quickly the nascent economic strength could be quickly choked off.

OPEC needs to be subtle and accurate as it re-opens the taps. Erring on the side of largess would make sense for the cartel in the short term. It doesn’t want to scare the bankers - and the wider consuming audience - by keeping the market too tight. But there are storm clouds on the horizon. Keeping a cap on oil prices by ensuring ample supply will discourage and possibly delay key investment decisions related to climate change.

What OPEC needs to avoid are public squabbles. It should be striving to drive policy in a composed and predictable way. The global economy is fragile and needs a smooth ride. Last week when the United Arab Emirates held out against a deal putting the groups carefully built cohesion at risk. It was quickly dealt with but also a timely reminder of the group’s sometimes fractious and erratic past.

‍Methodology

The TonMiles data represents ton miles of laden seagoing VLCC vessels.

TonMilesPerLegPerDay = Deadweight * MilesPerLeg / SeagoingDaysPerLeg, where MilesPerLeg are the miles of each leg of a voyage and SeagoingDaysPerLeg = NextArrivalDate - SailingDate.

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