*The interviewee’s statements reflect his personal vision and not that of his employer
Investing.com – The continuation of the crisis in the Middle East, with war between Israel and Hamas and the escalation of attacks on commercial ships by Houthi rebels, a military and political group from Yemen, has been causing volatility in prices this year. Even though freight has become more expensive, with longer transport times, the still robust supply of the commodity does not tend to be a problem at first, and the main price driver for this year tends to be demand, in Heitor Paiva’s view. , oil trading analyst at Maersk Oil Trading in Denmark.
With a Chinese economy below what analysts expected, leading to uncertainty about demand, margins on derivatives are not as high as in 2022, which could mean that some refineries may take a little longer to deal with supply interruptions, in their understanding.
In addition to a trend towards electrification of the fleet, which deserves attention, if the conflict in the Middle East escalates and prices rise, fears are that possible inflationary complications could lead monetary authorities in developed countries to postpone interest rate cuts – with the risk of a reassessment by analysts of growth prospects and, consequently, of global demand for oil.
Understand in the exclusive interview with Investing.com with the specialist, who previously worked at ED&F Man Capital Markets and Hedgepoint Global Markets.
Investing.com – The president of Petrobras (BVMF:) stated, in a recent interview, that there is little impact on the company from the situation in the Red Sea. Who has been most affected? Do you believe that the risks are specific?
Heitor Paiva – The biggest impact of this today is perhaps the diesel that goes to Europe. Because since sanctions began against Russia, with the inability to import Russian diesel, Europeans were buying a lot of diesel that came from Asia, mainly from India. So India must have become the biggest exporter of diesel to Europe this year and this Indian diesel was going through the Suez Canal, through the Red Sea.
Now they are no longer able to do this because the ship crews are afraid to sail in these regions, so they are passing through the Cape of Good Hope and this is adding a travel time of approximately 10 to 13 days on a route that would take much less .
This has caused the supply of diesel and gasoline to drop relatively significantly. We are seeing very low diesel and gasoline stocks in Europe, and this is a problem, because at this time of year, there is seasonal refinery maintenance, both in Europe and in the United States. The supply of refined fuel naturally already falls seasonally speaking. This disruption right now is a problem.
I personally think that it is too early for us to say that this is a short-term risk, because we have already observed, several joint attempts by the United States, with other NATO nations, aimed at trying to stop the Houthi attacks in the channel and they did not have the expected effect. The attacks were unsuccessful and, therefore, any vessel that passes there is vulnerable and will be until the moment these attacks actually stop, which no one is expecting to happen. In fact, the news only indicates that there is an escalation in the Middle East towards clashes that leave the Israel Hamas sphere and go to an older sphere of confrontation, as is the case between Iran and the United States. The Middle East as it is today, geopolitically speaking, has become a problem for the oil market. I don’t believe there is a short-term solution to this problem.
Inv.com – How do you evaluate Brazil’s cooperative participation in OPEC+?
Paiva – I am quite skeptical that this can bring any medium or long-term benefits to the country. Brazil had been opening the oil market in a very efficient way. This creates some uncertainties, which in fact, do not need to exist.
What is the principle of joining OPEC? It means being commanded, following rules established by a committee of group members that define how much volume will be able to place on the market. This creates some uncertainty for private producers as they do not know whether, for example, eventually the government will say that it now accepts OPEC’s cuts and will impose some form of restricting production. In fact, it is not a good thing for the country.
There is a lack of clarity about the reason that led the country to accept this merger, because the president of Petrobras himself said in a recent interview that Brazil will not take part in the OPEC cuts. So what is he going to do in OPEC? Why did you come in after all? I’m relatively skeptical, so I think Brazil would be better off.
Inv.com – How much of a loss of steam in China is a risk factor for demand? What others might be important this year?
Paiva – China really is an issue to look at with caution, because the bottlenecks that the Chinese economy has already been facing since 2021, which are basically the weakening of the real estate sector, have not been overcome in any way. So, with the real estate sector being a significant part of the Chinese economy, the continuation of the crisis in the sector is not a good sign and this is being reflected in manufacturing data.
China is a country that is relatively difficult to analyze from an energy point of view because it is not an open market. The government gives guidelines on when to buy for state and private companies. He released these import quotas, which ultimately saw demand. So demand is closely linked to the government’s political will, more than to short-term economic data, because the Chinese government traditionally plans in the medium term.
It is obvious that a weak economy in the short term is not a good sign, but it is not a unique and determining factor to say “OK, China will no longer participate in the market, we have to be pessimistic now”. Because whether we like it or not, China is still a very large refining point, with more than 10 million barrels being refined per day. Chinese diesel and gasoline exports have increased and have a foreign market. So China can import oil and not consume it internally, but export this derivative product. So I don’t think China is that big of a concern at the moment.
Still looking at the demand side, I think that this year, the main risks are related to the electrification of the light vehicle fleet in rich countries, which impacts the demand for gasoline. We already have very robust indicators in this sense for the United States, this is a medium to long-term trend, but the effects are already felt today.
The Middle East issue, if it gets out of control, and freight rates start to continue to rise sharply, perhaps we will see a rhetorical change from central banks in relation to the fall in interest rates and this, obviously, will cause that market expectations regarding the state of the economy worsen. If central banks start talking about being cautious about cutting interest rates due to a possible resurgence in inflation, obviously, people will expect a weaker economy, globally speaking, and less demand for oil. It’s a risk that I think shouldn’t be ignored, but as things stand now, prices have risen, but inflation continues to fall and economies have actually shown relatively strong results.
Inv.com – How you see the behavior of Saudi Arabia’s state oil company Saudi Aramco (TADAWUL:) after announcement of capacity increase interruption?
Paiva – This is obviously more linked to the political will of the Kingdom of Saudi Arabia than to market-related issues. I believe that, in fact, they see that perhaps in the long term, so much oil volume is not needed, because other competitors outside of OPEC are putting in a lot of supply. At a time when Saudi Arabia has defined that it will seek carbon neutrality by 2060, it is challenging. The environmental issue is still the basis for part of this decision. Furthermore, it is important to emphasize that Saudi Aramco’s decision received a lot of attention in the media. But I believe that, in fact, the government wants to avoid an oversupplied market in the long term and this is a common strategy for countries.
Biden, even this week, took a very similar action, but the media did not pay due attention, which seemed to me to be quite mistaken, which was in relation to the restriction of new concessions for the construction of liquefied gas terminals in the United States. As the USA was growing a lot in the supply of liquefied gas, the American government decided to intervene and say that perhaps a lot of capacity would be added to the market. And to protect the interest of producers, keep the product relatively expensive, you don’t want there to be overcapacity. Obviously, he didn’t say that, but he used the environmental excuse for the action. Governments do this in the energy market.
So I don’t see this decision by Saudi Aramco in a bad light. It was a very pragmatic solution, and the Arabs are well known for being pragmatic in the market, they don’t make a lot of noise. This was just a move to prevent the market from becoming oversupplied in the medium term, considering an increase in production in Brazil, Guyana, Canada and the United States.
Inv.com – What will weigh more on prices this year: supply restrictions or concerns about demand?
Paiva – The supply is very comfortable and that is why, in general, I am not yet convinced that oil has as much upside as some banks have said. There is a very complicated geopolitical situation in the Middle East, but looking at the future oil curve, prices are not indicating as great a lack of supply as they would normally be in a similar situation, if it had happened in the past.
I think the market is fully aware that there is supply, there are energy producers on the market, with Brazil and the United States, mainly, putting a lot of oil on the market. For the supply side to become a concern, the situation in the Middle East would have to get out of control in a violent way, and relatively in a big way, which has not happened yet.
In fact, the main price driver is still demand. We need confirmation that demand will be strong. There is a lot of supply on the market and demand is not very good. There are refineries currently operating under maintenance, and margins even for derivatives are not as high as they were in 2022.
So, this could cause some refineries to take more time to fine production, take advantage of the moment of low margins to take a little longer on these supply interruptions.
There are risks to this view that, for example, the margin on derivative products will remain low, refining margin. The war in Ukraine, for example, has not gone away. We are actually seeing a lot of news about Russian refineries being attacked by drones, which were putting money into the market, which was even going to Brazil. So if Brazil doesn’t import from Russia, it will import from the Gulf of the United States and will be competing directly with Europe. It’s a fine balance, so we are in a balanced market.