Opec faces seismic demand split

30 November, 2020 12:00 AM printer

LONDON: As Opec+ ministers gather virtually this week, the city that traditionally hosts their meetings will be locked down. Vienna’s Christmas markets will be closed, the famous Ringstrasse boulevard silent. For oil ministers, the scene should urge caution.

But while the Austrian capital provides a dramatic example of how the second wave of the pandemic is shutting down economies in Europe and the US, the global picture is more nuanced, report agencies.

In Asia, the situation is almost the opposite to that of Vienna. The streets in India were full during the recent celebration of Diwali; China’s Golden Week holiday saw millions take cars, trains and even planes to visit relatives across the country.

The east-west divide is an added conundrum for Opec+, which on Nov 30-Dec 1 needs to decide whether to delay a production increase slated for January - and if so, for how long. And there’s another crucial divide in the global oil market: while petrol and diesel demand have recovered to about 90 per cent of their normal level, consumption of jet fuel languishes at about 50 per cent. “The size of the shock and the unevenness of its impacts imply a recovery process which is far from smooth,” said Bassam Fattouh, the head of the Oxford Institute for Energy Studies.

In private, Opec+ delegates talk about the imbalance in the recovery, both geographically and between refined products. Increasingly too, they talk about another segmentation: crude oil quality.

The market for the denser more sulfurous crude, called heavy-sour, is tight, mostly due to production cuts from Saudi Arabia, Russia and other big producers.

But the market for so-called light-sweet is glutted, in part because Libyan barrels have come back to the market after a ceasefire, and European refiners are consuming less North Sea crude.

All those factors make the deliberations of Opec+ ministers trickier. And they have just one blunt tool at their disposal: raising or cutting overall production. Opec+ nations do not target petrol or jet-fuel production, but just crude.

There’s also a geographical handicap: most of their oil goes to Asia, where demand is strong, rather than Europe and America, where it’s weaker.