Co-Founder and Chief Oil Analyst at Energy Aspects
Jason Bordoff [00:00:05] Amid concerns about high energy prices and their impact on the global economy. The group of oil producing countries known as OPEC plus recently announced a cut in production in its recent meeting in Vienna, sparking a sharp backlash from leaders in Washington. Opec+ countries, particularly Saudi Arabia, defended the decision by pointing to a weak economic outlook globally that would depress oil demand. But others saw a tight oil market, low inventories, concerns about near-term supply shortages, and thus concluded geopolitics may have been at play as well, including the relationship between OPEC countries and Russia. In Washington, calls for retaliation were immediate, including possibly a cessation of arms sales to Saudi Arabia. Legislation to strip OPEC of its immunity from antitrust lawsuits or new releases of oil from the Strategic Petroleum Reserve. So was the market in need of a production cut? How much did geopolitics play a role in Opec+ decision? This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Today on the show. Amrita Sen Amrita is the co-founder and chief oil analyst at Energy Aspects. She leads their analysis and forecasting of crude and products markets. She was formerly the chief oil analyst at Barclays Capital. She holds a masters in Economics from the University of Cambridge and a Ph.D. in economics from Southwest University of London. Amrita’s deep understanding of the complexity of the global energy sector, along with a wealth of industry, relationships and experience. Allow for a unique perspective on the market outlook. Earlier this month, she warned clients U.S. shale output could peak as early as 2024. I spoke with Amrita about the rationale behind the Opec+ cuts and how influence it may have been by geopolitics. We also spoke about the U.S. response and the production outlook for the years ahead. I hope you enjoy. Amrita Sen, welcome back to Columbia Energy Exchange. Good to see you again. Thanks for being with us.
Amrita Sen [00:02:16] Thanks for having me. I’m super excited.
Jason Bordoff [00:02:18] Yeah, so am I. This is a timely conversation. Energy prices, particularly oil and gasoline and diesel prices, are much in the news. They’re on the mind of people here in Washington as we head into midterm elections. And then we have this potential rupture. I’ll let you characterize it. But this strain in the relationship between the U.S. and OPEC, particularly Saudi Arabia, kind of in the driver’s seat in OPEC after OPEC countries announced that they were going to cut oil production. So first, just a level set for everyone listening. Just remind everyone what happened at this in-person meeting in Vienna that caused such consternation not only in Washington, but India, other other countries that are big importers of energy and worried about energy prices. Just remind everyone what happened and what the market response has been.
Amrita Sen [00:03:10] Sure. I mean, look, OPEC met at the start of this month and they cut production or I should say cut quotas by 2 million barrels per day. The reason I make the distinction is because most of the members are actually already producing so much below quotas that the actual cut to the market, or at least on our numbers, is only about 930,000 barrels per day. It varies a little bit depending on who you ask. On average, it’s about a million barrels per day. So again, that’s the ballpark you’re looking at. So that’s the cut to the market. Now, did they necessarily need to cut this volume, given that we are coming into 5th of December when the EU embargo on Russian crude is going to kick in? We don’t have a lot of U.S. production growth right now. That’s where a lot of questions have been raised. But from OPEC’s Opec+ point of view, they’ve been very clear on why they’ve done this. They very much fear a recession. China is still not back open. What’s been going on with the rising dollar and what that does to emerging markets? So they are effectively preempting any stock builds by cutting production. We could argue that by keeping oil prices high, it doesn’t necessarily help emerging market demand. And that’s that is definitely a strand of argument. But we have to remember that OPEC’s are looking at the oil market and their interests lie in that. And within that, it is very, very logical for them if they do believe a recession is coming to preempt that. And that’s what they believe they did. Of course, the this has kind of led to a lot of anger, particularly in the U.S., I would argue, in terms of at least so far, the price reaction hasn’t actually been, quote unquote, bullish. Yes, we were in the eighties and now we are in the nineties. But again, it’s not that we are trading at $220. So at least in terms of OPEC’s point of view, they were trying to provide a floor to prices. They’ve achieved that. And you kind of have to ask the question that, yes, the White House was upset because they probably didn’t want this ahead of the midterms. But it’s equally note that prices are super high. Right. So there is something to be said about that as well.
Jason Bordoff [00:05:35] Yeah. And we’re talking today the price of Brant, I think is in the low nineties, and that’s a bit higher than where it was in the days leading up to that meeting in Vienna, but not a huge amount higher. So just how people understand your view of where the oil market is, those those market driven explanations for a production cut, Did you see a market that had too much supply was there? It’s hard to know what the counterfactual is. Is it, in your view, likely that but for this production cut, prices would have continued to slide. Is that the market you were looking at or was it in fact a market that where something like this wasn’t wasn’t necessarily needed if you were trying to keep prices were roughly where they are today?
Amrita Sen [00:06:17] I think that’s probably the hardest question to answer, Jason. The reason I say that is because if you’re looking purely at fundamentals, we actually have strong bills in October, but we are moving into draws from November onwards and big draws in December. Purely based on that, I would say, no, we didn’t need that. However, the problem we’ve had throughout this year is that there is a big disconnect between the physical market and the financial market.
Jason Bordoff [00:06:43] And just for people listening, just sort of explain and explain what that means. I mean, sort of the the sentiment, the perception is different from just the reality. If all you’re doing is looking at supply demand inventories and somehow just bearish sentiment was building that was driving prices down, even though the fundamentals didn’t didn’t support that. Is that what you mean by that?
Amrita Sen [00:07:04] Absolutely. I mean, look at the summer of this year. Brant traded, let’s say, at $105. But we actually had physical crude grades. So these are crudes produced in the North Sea or West Africa. Each crude has its price. These crudes were trading 30, $35 above what we are talking about over here, which is the price of Brant. Usually there is never this level of disconnect. The reason, however, this year and it gets a little bit technical, but bear with me, it the reason there is this disconnect is because since the Russian invasion we’ve actually had a huge increase in margin. So when you are trading, for instance, you actually have to put a certain amount of money up in exchanges as effectively because if the volatility is very, very high, you can get what is called a margin call. So the higher the volatility, the higher the amount of money you effectively have to put as collateral in an exchange. Think of it as in some ways, when you’re buying a house and, you know, if interest rates are going up a lot, the amount of money that gets tied up in your mortgage repayment just goes higher and higher. Right. So therefore, the amount of money you have to spend on other things goes down. And that’s kind of what’s happened in the oil market, to be honest. In the energy space this year is more and more capital has been tied up just to manage these positions. And then on top of that, you have so much policy risk, you don’t know how the U.S. will react to the Opec+ cuts. You just don’t know that uncertainty with regards to the price cap, how that will play out. So people have just shied away from putting on positions, especially because most companies have actually had record profits in the first half of the year. So they’re like, look, we’ve made the money for the year. Let’s not dip our toes into this really uncertain world. So I think that was one of the reasons I would say it is going into the meeting. You know, I was in Singapore for OPIC, which is like the big oil industry gathering. This was the first time since COVID. I had plenty of really senior execs, heads of trading of companies say to me, Oh, if all bank doesn’t cut, we’re going to go to $60. Clearly, that was going back to OPEC, right? So regardless of what our view was on fundamentals and this is something we were saying as well, is that it was in this vortex of bearishness, like you mentioned, it was just the lack of almost human participation, but constant selling because of recessionary fears. Nobody was there to put a floor on prices. And that’s exactly what OPEC’s ended up doing.
Jason Bordoff [00:09:41] That’s their objective. You take it if you mean, as you said in the beginning, that people are taking action in their own self-interest. What what they’re trying to achieve is revenue maximization. Figure out how to get as high a price as one can. That’s the objective for Saudi Arabia right now.
Amrita Sen [00:09:57] I would say so. I mean, again, it goes back to Opec+ is looking at their own self-interest, Right? And again, rightly so. I always have said this, that Opec+ also doesn’t want a very high oil price because ultimately that hurts long term demand. But $90 oil is not going to cause a recession. We are in a recession because aid generally it’s an economic slowdown and we were getting into it anyways. B It’s because of high gas prices, but it’s not oil, right? So we can’t keep saying oil prices are too high and that’s what’s going to lead us to a recession because $90 oil prices aren’t too high, especially when you compare that against gas and coal. So that’s what they were doing. Now, of course, that might have worked a few people, but if you think of it in terms of each person or each player in a market maximizing their kind of self-interest, that’s what Opec+ ended up doing.
Jason Bordoff [00:10:51] And, you know, the response on the other side, which is not just about geopolitics, the role of Russia will come to that in a moment, but just looking at the fundamentals which you and energy aspects do every day. And our friend Javier Blas wrote a critical column just after this OPEC meeting saying, Look, $90 is a pretty high price by historical standards. Inventories are low. The the shape of the futures curve is, is one that suggests the market needs more supply today, not in the future. So when you look at all those fundamentals, this is not a market that needed a large production cut. Is that your view as well? Do you think those are those are reasons for people to be. And then the consequence of that is people would speculate there must have been something else going on here and there must have been politics, there must have been geopolitics.
Amrita Sen [00:11:40] Absolutely. And I think that’s the best way to frame it, because like I was saying, if you look at all fundamental balances, we were going into stock draws after the October bills. And by the way, the October builds a seasonal. It’s because refineries always go into maintenance. You always have crude building at this time of the year. But to your point, I mean, inventories are at a record low everywhere. We need some inventory builds to be honest. And if you look at just look at Cushing, Right. That’s kind of the center when it comes to. At least in the U.S. There’s a great chart which we’ve published a few times historically. Cushing Inventories between 2015 and 19 write the five year average around 50 million barrels. This year, it has failed to breach 30 million barrels at any given point in time, and historically, 30 million barrels or less than 30 million barrels, just like a critical level at Cushing. We’ve really drawn down two time bottoms a few times as well. So this is not a market that is oversupplied now. This is why it’s so difficult for some people to understand OPEC’s decision, because OPEC are saying we are preempting what they believe is a significant slowdown coming in oil demand. And they, by the way, very strongly believe that Russian oil will stay in the market. We are not going to lose Russian oil despite the embargo. So if that’s their view, then, of course, they’re mainly concerned about the demand and the economy and therefore they are acting in advance. But if people don’t see that and again, fundamentals, if you look at the shape of the curve, this is the most backward we have been kind of this year from not right now, but if you look at the summer, but even right now we are over a dollar backwardation across the curve, again, telling you that supplies are very, very tight right now. But they are saying we are preempting what is coming and a real slowdown. And that’s why we are trying to be we are trying we are trying to stabilize the market. Because there is one thing over here, and we’ve seen this a couple of times, and I really do think the market forgets the impact 2020 has had on OPEC, that price fall and the fact that we went negative. You know, if you’re then reacting, you’ve allowed inventories to build enormously. Sure, 2020 was exaggerated. But once you allow inventories to build and the curve kind of flips from what we call backwardation to contango, essentially that therefore less supplies are required today. It’s very hard or it takes a lot of cuts to flip that around. So that’s why they are, at least in their view, they are acting in advance.
Jason Bordoff [00:14:22] And you. But those fundamentals you described low inventories. You mentioned a curve that is backward, dated again, like a technical term for the price today is higher than in the future and suggesting tight markets today. It sounded like you you did your view is it is reasonable for one to infer from that that there were additional factors at play here beyond just market fundamentals? If I heard you right and I’m wondering if you can elaborate on what you think those are with regard to relations with the Biden administration, relations with Russia or something else?
Amrita Sen [00:14:58] No. So, see, from my point of view, I what I’m saying is that our fundamental outlook is different from OPEC’s right. So from our fundamental point of view, we don’t think these cuts are required. But I have always said this about OPEC’s decisions. It doesn’t matter what you and I think the balances are, the only thing that matters is what OPEC’s thinks the balances are and their balances were or their fear is that we are going to get these big stockpiles should a recession kind of come through and China not opening up. So that was the number one justification. There’s no doubt about that. The other thing I will say, however, is that the price cap hasn’t helped because it creates a lot of uncertainty. It has. And we’ve seen Prince Abdulaziz talk about this as well afterwards that we just don’t know in the lead up to the price gap how the market will react. It just creates so much uncertainty that if it kind of leads to almost an oversupply, which again, we don’t think it is going to work simply because China, India, Turkey haven’t even accepted it. But again, it’s that uncertainty they were trying to get rid of. Also, in our view, I will also highlight the very fact that the price cap is problematic for many reasons. But I’ve heard this from Asian refiners that there’s already been talks within Asia about, oh, look, if we can buy Russian oil at X, whatever that is, let’s say $60, well, we can maximize how much of the Russian oil we can take. And then the next barrel, which could be the Saudi barrel or the Iraqi barrel, well, they need to compete with us on that, because otherwise we can always buy an extra barrel of Russian crude, especially because the EU, after the embargo, will not buy Russian oil. So this is an issue because suddenly you have consumers dictating a price for the oil market, which hasn’t happened before. I was with U.S. producers about ten days ago and I was amazed how vocal they were against this price gap because suddenly they were like, hang on. Do we have to sell it at this price in the U.S.? Sorry, in Asia? So there is a lot of resentment. I’m not saying that was the main driver, but it didn’t help that. At the same time as the OPEC meeting, you had constant messaging from the U.S., U.S. Treasury in particular about the price gap, about, you know, why it’s important and it must be implemented.
Jason Bordoff [00:17:25] And just to remind everyone, you know, listening, you’re talking about the European embargo on Russian crude and then next year, refined petroleum products, which people and the provision of services, financing insurance, which some fear may make it hard for Russia to sell oil in other parts of the world, even besides Europe. So the price cap would be a mechanism to allow that the provision of those services to continue. If if countries that are buying Russian crude pay below a certain amount. That’s that’s the idea. And I think what you’re describing, if I hear you right, is your sense that one of the factors that informed decision making in Vienna was that this this this as a precedent may have made some countries upset and and influence their decision to to do something that would not be not be welcome in D.C. is that is that what I’m hearing you say.
Amrita Sen [00:18:21] Or I would at least say that it didn’t help, given that you’ve already got a backdrop which was where recession and the stronger U.S. dollar was absolutely the front and center. It didn’t help that the price gap adds a level of uncertainty that, according to them, is just not required at this time.
Jason Bordoff [00:18:39] Yeah, at this point, we’re kind of talking in technocratic terms about oil market management. Clearly, that’s not the way many people have perceived the action in Vienna. It’s caused quite an extreme reaction on both in both parties, on both ends of Pennsylvania Avenue in Washington, even some other capitals around the world besides D.C.. So just explain that why we’ve seen that reaction and what the consequences have been. And does that seem like a fair reaction at a time when oil prices are pretty high and and people now see at a time when they’re worried about Russian oil supply, OPEC? Well, with Russia as a leading member of it now taking oil off the market.
Amrita Sen [00:19:22] I mean, what I would say is that the fall out of this meeting, you know, we keep hearing about Russia weaponizing gas and weaponizing oil. But I mean, right now, the U.S. reaction to some in some ways to the Opec+ meeting has really politicized oil. Right. Whether you know, whatever the reason for Opec+ cutting was. I mean, the reaction very much has been we are entering into a period of tightness, right, with the Russian with the E.U. embargo on Russian crude oil kicking in from the 5th of December. So how could opaque do this? You know, we’ve both, I’m sure, spoken to different groups, hold even the same people who’ve kind of highlighted to us how irresponsible this is for the global economy and so on and so forth. And look, I’m not privy to all the conversations which allegedly a lot of media outlets have reported on between the two sides prior to the meeting. But the accusations are pretty immense. Right. And but then you also had I mean, obviously, the U.S. is going out there, and I do think it’s in U.S. officials interest to downplay the Opec+ cuts. But there is a slight dichotomy over here. On the one hand, they are downplaying the cuts and saying, oh, Saudi Arabia caused everybody, which, by the way, over the weekend, every member country has now come out and said, no, this was a unanimous decision. But they’re trying to downplay it and say the cuts are not going to be very big. It would only be Saudi Arabia that actually cuts. Yet, on the other hand, they are talking about either doing an SBIR release to combat this or, you know, limiting some product exports. So if the cuts are actually that small, why do you need to do an SBIR? Right? There’s an element of that. But regardless, I’m sure, I mean, now you’ve had Saudi Arabia come out with that statement as well, very explicitly talking about, you know, authorities, their view of what happened and reports suggesting that the U.S. administration was aware of the cuts, but they simply said let’s delay till after the midterms. Like I said, I’m not privy to that conversation. Whether that happened or what was agreed or disagreed in that meeting. But like you said, it hasn’t been taken. It hasn’t been taken well. At all. In D.C., I think for me, the big question is that what’s the offramp here? Right. No legislation is being talked about this constantly. Right now. Fingers are being pointed and we can’t have an oil market given this is the biggest energy crisis we are in where, you know, the biggest producer in the biggest consumer are not really talking to one another.
Jason Bordoff [00:22:06] One element of this that that caused a lot of consternation. I just want to get you to respond to it, which was a sense that even if there is a very technical, market based explanation for why oil markets needed a cut, now, it is difficult to separate that kind of decision making and analysis in in Vienna, where OPEC sets from the fact that one of the countries that sits as a key decision maker in a leadership role in that organization is Russia, which is in the middle of a horrific and illegitimate invasion of a European country. And at a time when G7 countries are trying to deprive Russia of oil revenue, an action was just taken that potentially will enhance Russia’s oil revenue. And we were worried about whether in response to the price cap or something else, the Kremlin has threatened to retaliate. We will just one, we won’t sell oil if you move go forward with this price cap and we’ll just we’ll just sell less oil. Well, in a sense, that’s part of what happened in connection with a group of other countries that are making, again, somewhat technocratic arguments. And I think a lot of people have trouble separating those two things.
Amrita Sen [00:23:13] Yeah. And again, the the problem is the times we are in it does make it very hard. And like we’ve just talked about right here, right now, the market is tight right here, right now. Inventories are very, very low, which is what makes it hard. But equally, if OPEC’s prognosis is right about the economy and we are heading into a very big slowdown in oil demand, then you know what? They might be proven correct in a few months time. The one thing I will say, though, right, even if you take away the recession argument, the one technical factor I do see as a very, very strong argument is putting a floor under prices because there is just such a lack of investment. And by the way, these high, quote unquote, high prices aren’t really incentivizing a lot of production. I really do think the last thing the market needs right now is a it’s a lot of volatility. Let’s say we did fall to $60 just as an example. For whatever reason, that will not help that kind of medium term supply story that we need today more than ever before, at least on gas and to an extent on oil because of what’s going on with Russia. So that’s one aspect of it which has been talked about, but probably underplayed by the media that there was a real effort to let’s put some stability and a floor under prices so that we can also make sure there is that medium term investment. But keeping that to one side, I mean, look, Russia being a part of Opec+, we can’t separate the two. Right. And I think that’s why it does become very, very political. How and we’ve said this before as well. I mean, Putin has come out very openly and said if you do a price gap, I’m not going to sell whether it’s the oil or the gas. I think he’s been very clear. But B, we’ve seen Russia meddle in, for instance, Kazakhstan, right? Like the CPC pipeline, half like half of this year. It’s just not been operating at full capacity. There’s constant leaks or checks, which is never happened ever, ever before. And Opec+ will be definitely a place where Russia is influential. It’ll yield its influence. But equally, you know, one of the things I will argue, I know the U.S. administration believes the reason the price gap works is because Russia requires the revenues from oil and therefore it will not cut off oil exports itself. But here’s the problem. Russia doesn’t need to cut off its own oil exports. It can also be puts oil exports such as Kazakhstan. Let’s not forget that Russia’s got its tentacles in a lot of different countries. Libya is one of them. Iraqi Kurdistan is another region similarly to an extent, again, given it’s a part of Opec+, of course it has a big influence in decision making. I still don’t think they were the driver, by the way, of this court. I don’t believe that for a second. But of course the yielded the influence which and then of course, I mean, given where prices were headed, I don’t think it was a difficult decision, by the way, to get everybody on board. This was one of the quickest meetings You and I have both been through, OPEC meetings, which have lasted for days. When there’s disagreement, it’s very out in the open. There was no disagreement this time around.
Jason Bordoff [00:26:23] Yes. I mean, there’s been a lot of post Monday morning quarterbacking about whether there was agreement or some countries coming out and saying they didn’t support this, but it was pushed through. But you’re just your understanding of what happened is there was there was agreement. I just want to clarify.
Amrita Sen [00:26:41] I do think there was agreement. I mean. Look, there are some countries that always want to raise production versus others. But I will say this much that we have seen OPEC meetings even this year when there have been disagreements and very clearly last year what happened? Trust me, when there is disagreement, OPEC meetings are this quick.
Jason Bordoff [00:27:01] Even if the technical explanations you’re giving, you know someone someone believes that. But for this, prices would have slid further and prices were headed down if they hadn’t done something. Ask explain why. Particularly and again, I know it’s not the only member of OPEC, but it is the one who plays it that plays a leadership role. Saudi Arabia. Why do this? Why is it in their interest to spark this sort of extreme backlash from Washington with questions about no antitrust arms sales? Lots of things on the table now in a serious way. We don’t know what will happen, but being discussed in a serious way. Why? Why take the step? Or were people just blindsided by how extreme the reaction in Washington has been?
Amrita Sen [00:27:45] I think it’s the latter. I really don’t think anybody in Opec+, and particularly not Saudi Arabia, expected this to be the reaction. And look, I’ve heard comments from others as well, saying when the U.S. stood a million barrels per day of SPR, we didn’t come and cut production then. They were talking about back in March and April what had happened. We continue to add oil to the market. So the I mean, and this is not Saudi Arabia. I’m saying all those have others within Opec+ have commented on this as well. So I do think nobody expected the reaction to be this strong from the US, rightly or wrongly, by the way, because clearly, I would argue, given the level of conversation that’s been going on on both sides, they should have seen something coming. They probably didn’t expect it to be as. As kind of the big reaction that we’ve seen across the board. Right. Like you say, from both parties has definitely taken the market by surprise. Now, you could have argued the same thing, could have been done and said, but in a different way. Right. Like we all know that the actual level of cuts is about a million barrels, but they call it that, Right. Which, to be fair, Prince Abdulaziz did mention in the press conference that, look, the actual cuts are going to be this, but the headline number was 2 million barrels per day. So and I get it. Look, OPEC only deal with quotas and it’s a very kind of technical organization that way. But it doesn’t help. It doesn’t help that we’ve got these big numbers being thrown out, even though the actual cuts are going to be less.
Jason Bordoff [00:29:23] And probably I don’t know if you agree something about a last minute decision to move the meeting to in person and have the Russian deputy prime minister get out of a car and walk into the OPEC headquarters, all of that kind of fed a perception about it, don’t you think?
Amrita Sen [00:29:38] Again, yes. From a perception point of view, absolutely. It fed that. But like I said, I really don’t think that Russia was the big driver of this decision. I do think a lot of countries were in agreement because of what the fear, at least that had been instilled by the market. Like I’m saying that I’m not saying whether the fears were legitimate or not. Right. That’s a separate argument. Like we don’t we never believe for a second that fundamentals would have justified a $60 oil. But traders don’t think like that. Right. And that’s why I kind of mentioned what people were saying to me as well. And if that’s what and I know, by the way, some of these really senior traders were feeding this back to Opec+, Saudi Arabia and UAE and so on, saying prices are going to go to this level. It’s not a very difficult decision to convey to the members. By the way, most of you are not even producing enough. Right. So what’s the for them? What is there to not cut production if that at least provides a floor to prices? I really do think that worked in terms of getting the argument. But yes, again, from an optics point of view, given where the West is vis a vis Russia, it absolutely didn’t look very good at all.
Jason Bordoff [00:30:50] What do you think the long term implications are for the US Saudi relationship? Is this a seismic event? Is it a blip? And what actions or responses do you expect from both DC and Riyadh in the months to come?
Amrita Sen [00:31:04] I mean, look, I’m an optimist and I will say that US-Saudi relations have gone through lots of ups and downs, right even in the past couple of years. I, I know a lot of people have said this was a game changer and so on and so forth. But I still believe that both countries are. You know, the relationship between both countries goes beyond oil. There are other very important factors, defense and just general cooperation. So I struggle to think that this is it and this is the end. And yes, of course, there’s right now, if you ask me what happens, I’d say the U.S. probably. He does come out with some kind of strategic petroleum reserve release, which just to kind of temper prices again. I don’t necessarily think that prices are particularly high like in terms of $90. If you’re doing an SVR above 120, that’s that’s different. But by the way, I say that and I catch myself saying that because ultimately an SPR was designed to only be used when there’s an actual outage as opposed to prices. Now, I find myself always talking about, oh, yeah, at these price levels they could do an SPR, which is not what the SPR was designed for. But anyway, I do think that there will be some form of strategic petroleum reserve release, potentially some limitations, particularly around diesel in in the kind of New York area, because stocks are very, very low.
Jason Bordoff [00:32:30] You’re talking about export restrictions. Is that what you’re referring?
Amrita Sen [00:32:32] Export restrictions, yes. But maybe just or even kind of think about a differently that refiners will be asked to build inventories up to a certain level, which has the same impact. Right. You will then what New York regional PADD one doesn’t really export they need to import more. So if it is a very specific requirement around the New York Harbor, then actually imports will go up and it will be counterproductive because prices will need to go up even more to attract these imports, by the way. So it’s really not a good solution. But again, ahead of the midterms, I can see the US come out and do one or both of these, right. That that can absolutely be the kind of quote unquote retaliation. But I do believe that karma heads will prevail ultimately. But yeah, like I mentioned earlier as well, the off ramp to this is going to be the most critical because, you know, pointing fingers at a time like this is not helpful for kind of the energy markets as a whole.
Jason Bordoff [00:33:37] As you said, one of the ideas on the table or that’s out there is the possibility that the administration could restrict completely or in part the export of refined petroleum products, the things we use oil to make, like gasoline and diesel. What would the impact of that be on prices in the U.S. for drivers here and other users, consumers here? What and what would the effect be on other markets?
Amrita Sen [00:34:04] So I should start by saying that any form of restriction, it’s a really, really bad idea. The reason I say that is because the US, the way the US system is set up the the Gulf Coast. So Texas and Louisiana, they are big exporters of gasoline and diesel, particularly to Mexico and Latin America as a whole. And some of it comes to Europe as well. And then the New York Harbor area tends to import just because of the way the pipelines and the ships are set up. The pipelines are already maxed out from part three to pad one, but pad one still requires more than that, and therefore it imports. So let’s assume this is a restriction across the US, right? Not just for PADD one. If it’s just for pad one, then prices actually will rise further for imports to be attracted, it’s set to be completely counterproductive, Right. If the objective is to lower retail prices. If it is a US wide restriction. If you particularly look at part three, for instance, imagine what happens to key allies such as Mexico. Mexico is entirely dependent on gasoline, mostly, I should say, not entirely. Some barrels come from Europe and Asia, but it will have to rush to get exports or sorry, imports from other parts of the world, Europe and Asia. And it will completely drain pretty much all the Asian molecules which would have otherwise gone to Europe. Remember, we have the product embargo kicking in against Russian products exports on the 5th of February. We also have some U.S. material, not that much, but some U.S. material coming to Europe. In general, any export restriction on US products will lead to a massive skyrocketing in products prices in Europe, in Latin America, but even parts of Europe sorry, parts of the U.S., because it needs to attract imports. Right. And this is this gets really messy. But let’s say you say 2 to 3 refiners. Hey, you guys, context.
Jason Bordoff [00:36:11] That’s the U.
Amrita Sen [00:36:12] Gulf Coast and the Gulf Coast, right? Says Texas. Louisiana guys, you say, hey, you can’t export anymore, but then you don’t wave the Jones Act. So then you don’t have enough U.S. vessels to carry that oil to the New York Harbor area. So it doesn’t achieve what you’re trying to achieve anyway. So any of these measures really need to be thought through because otherwise, Yeah, I mean, in general, like I said, I started by saying it’s a bad idea because you are just going to raise the cost of. Across the board.
Jason Bordoff [00:36:43] And then another idea on the that that’s out there and I think now has been proposed added to a bill by Senator Grassley, no PAC, which has been out there for a really long time. It would effectively give the U.S. Department of Justice the discretion to bring to bring antitrust action against OPEC countries for colluding to set the price of oil. What what would be the impacts of that if if it were to pass and be signed by the president?
Amrita Sen [00:37:11] This is a very, very interesting thing that’s been going on. Right. Because no panic is not new. We’ve had threats of no back before. But usually it’s been the president, whoever the president has been at the time has simply never gone ahead with it. Right. It’s just never passed. Now, we have seen how worried Saudi Arabia was in the past about no PAC. But I just don’t necessarily see the same fear across all PAC. I would say not just Saudi Arabia, at least this time around, perhaps because none of them actually think it’s going to go ahead because it hasn’t in the past. But also, I think the issue is the legislation is unlikely to advance before the midterm elections. Right. And then even during the lame duck session, it might not get on to the congressional schedule. So then, if it hasn’t passed before the start of the new legislative session, would it go back to square one and it could lose momentum entirely. So maybe that’s why at least OPEC members I haven’t heard anybody kind of raise non-OPEC concerns this time around compared to in the past.
Jason Bordoff [00:38:22] But that’s because, to be clear, you think they think it is less not likely to happen or because is have things changed in some way that nobody cares anymore?
Amrita Sen [00:38:31] No, I do. I just wonder whether they just or just everybody thinks it’s unlikely to happen because I think even members on both sides, Republicans and Democrats, actually don’t believe no PAC is an effective way to lower prices. Right. And we’ve seen even other industries kind of come out and say, look, there are consequences of doing no PAC because it potentially exposes U.S. industries there as well into OPEC countries to getting sued. So I just wonder if that’s where there’s been a little bit less concern about no PAC this time around, simply because they don’t think there’s momentum behind it.
Jason Bordoff [00:39:11] And if it didn’t if it did happen, just to speculate, I’m curious, like what what I know you’re we’re speculating a little bit what you think if would it have no impact on how people sit in Vienna and think about this? Would it make them more concerned about upsetting folks in Washington? Would it would it would. It caused the end of OPEC. Well, what do you think the implications would be?
Amrita Sen [00:39:31] Yeah, And like you said, we are speculating over here. Look, on a technical level. Non-OPEC definitely adds some legal risk. Right, for U.S. operations of opec+ national oil companies. You have, for instance, Aramco trading now is taking over Motiva, which is a big refinery in Texas. Right. So you it will have to prompt some reorganization to try to mitigate the risks. But I don’t know how governments in these countries might react, because if we are in this phase where every side is pointing fingers, does it actually have the impact of saying of deterring further cuts? Does it or could it have the impact of potentially angering OPEC countries even more and saying, fine, if you do this, we will not send any oil to your country? Right. I mean, again, it’s hypothetical. I’m not saying this is going to happen, but I do worry about that, which is why I think de-escalation is probably a better solution right now, simply because if if there’s hotheads on both sides, I don’t think the reaction to something like a no back will necessarily be, oh, let’s reverse the cuts. It could actually be, okay, we’re going to double down.
Jason Bordoff [00:40:49] I suspect one element to whether whether there is escalation or de-escalation. As you think about the relationship between the U.S. and Saudi Arabia or the U.S. and OPEC more broadly is what happens to energy prices moving forward and whether we see oil and gasoline prices spike or or stay where they are or go down. So tell us tell me about where you see prices headed, given risks to supply, particularly. I want to hear what you think is going to happen when this European embargo on Russian oil goes into effect in December. And then on the flipside, what’s going to happen to demand, given how much concern there is about recession in the global economy? Lockdowns in China. Talk about both.
Amrita Sen [00:41:31] Look, we’ve been of the view that going into next year I’m going to couch this answer with a lot of ifs, but going into next year, we do think prices will be. In that 110 to $120 range for Brant. The reasons are, you know, continued supply losses and I am really amazed as to why the market isn’t paying more attention to U.S. production over here. And by the way, this is the one thing the U.S. administration has had banked on. Right. The point about doing the 180 million barrels of SPR was that, oh, by December, I was told myself by officials that, look, by December, U.S. production will be up 900,000 barrels per day and that’s it. We don’t have to continue with the SPR. The reality is U.S. production is flat at best and really, really struggling. So I think that’s a huge bullish factor for the market. We’ve obviously, you know, you’ve seen what OPEC’s U.S..
Jason Bordoff [00:42:29] Production is flat year on year. I thought we were going to see four or 500,000. No, no, we.
Amrita Sen [00:42:33] Will grow your own. You will grow about 600,000 barrels per day in our numbers. Exit to exit 550. Precisely. But it’s it’s flattening in terms of if you think about the month on month growth, I think the expectation for some was a lot higher. Like people were talking about millions of barrels per day of growth rate is going to come in at half of that. Yeah.
Jason Bordoff [00:42:51] Well, you just I know your your research firm energy aspects just put out a note sort of saying you expect in 2024, U.S. production has reached its peak. U.S., U.S. shale, U.S. title oil production has reached its peak. So this the shale revolution that has, you know, transformed a lot of things going from something like 5 million barrels a day at a peak to 13. And and now it’s fallen a bit. Has that run its course? That’s a pretty important element geopolitically, economically, that’s kind of a big deal, if that’s true.
Amrita Sen [00:43:21] Absolutely. I mean, look, for us, the piece we published, we’re talking about crude oil only, right? We are saying that the black oil element of shale has peaked simply because I shouldn’t say that it’s peaked in the sense that it’s going to suddenly collapse, but that it plateaus from here. Right. We are seeing aboveground lots of constraints with rigs and steel availability and diesel prices and labor issues. But even Tier one acreage, which is the best quality acreage in the different basins around the U.S., a lot of producers are saying to us they’re just out of tier one acreage. It’s only in the Permian Basin that there are some Tier one acreage is still left. That’s that’s one big thing. The other important aspect of this is that we are going to continue to get shale growth, but it’s going to be in gas and in NGL. Right. It’s just that the oil bit of it, but that’s kind of where we end up. And that’s one of the things kind of going back to what we’ve been talking about, why I think, you know, keep drawing the SPR at a time when energy security is at the top of the agenda. It should be. And U.S. shale is quite different today than what it was last decade, right? Last decade, we had even 2 million barrels per day of growth out of U.S. shale. And right now we are talking about four or 500,000 in a couple of years. Flat lining and sure, at a very high price, you are going to get Tier two and Tier three acreages, which is basically the poorer quality acreage. But that almost justifies what we are saying about our price forecast, that you almost need $120 now to get that additional poorer quality shale production rather than $80 or even 60 in the past. That’s kind of one aspect of it. And by the way, nowhere else are we getting production. Growth is a little bit in Guyana, Brazil and Canada, but that’s about it, right? And kind of pivoting back to what you asked about, kind of how we see the 5th of December, very briefly, we actually do think crude exports from Russia will more or less find a hole. But the problem is going to be product exports. I know the U.S. treasuries particularly worried about the shipping insurance. That’s why they want to do this price gap. We actually think between India, China and a lot of the Middle Eastern players as well. There are enough ships to carry the Russian oil. Two things I would highlight. One is Russian oil will, instead of going 3 to 4 days into Europe, now, has to go 30 to 50 days to Asia and then come back empty. I think that is something we should be very aware of, that the amount of oil that’s going to get tied up in water is going to be a lot. So you’re going to get a lot of volatility. And maybe Russia is forced to shut in some production as a result of that. But the products embargo is far more important because Russia sells a lot of diesel and India and China need crude, but they don’t need diesel. They already have diesel. And if you look at as of today, Russia has really struggled to find homes for diesel, alternative homes. It tried Latin America, I tried East Africa. You know, the US has very strong kind of footprints in these areas. They told the East African countries, don’t forget where your foreign aid comes from. Right. So that’s going to be the real challenge for Russia. So they will have to cut runs. And that’s where we think USSR, Russian production will potentially fall by. Another million barrels per day. But that’s really next year rather than in December.
Jason Bordoff [00:46:46] And do you what do you expect with this G7 price cap idea? Is that something that can work in your view or or not?
Amrita Sen [00:46:55] It will only work if you have the buying of the big consuming countries India, China, Turkey, Right. If these countries continue to buy Russian oil and by the way, if Putin has threatened to not sell them oil if they sign the price cap, the incentive to do so is going to be limited. Now, having said that, I do believe that some Indian refiners are making the provision in their contracts now. They are saying, look, we need to at least have a clause that if we are forthright, if there is, for instance, fears of secondary sanction or whatever it is, if people are making clauses that allows them to enter a price cap, should there be like enormous pressure from the U.S.? But as of right now, none of them want to. And one thing I will say in terms of the price at which Russian oil is selling, it’s already selling at a big discount. It has been selling at 20, $30 discounts depending on the time of the year you look at. And the more freight goes up. So the cost of shipping goes up because you need to ship it longer distances. The more Russian oil will have to discount anyways to clear. Right. Why will India pay for the shipping cost? Right. So in some ways the market is actually doing the work of the price gap in some ways, right? That it’s kind of saying, well, you know what, Russian oil needs to discount further and further to go east. But anyway, I think that’s kind of the challenge with the G7 price gap that unless and until the big importers of Russian oil agree. And we just don’t think China is going to agree. And even Turkey and India have really pushed back. That’s going to be the reason why it’s just not as effective, because Europe or the EU and U.S. are already either have banned or will be banning Russian oil. I know you asked about demand as well. Very quickly, we are actually the most conservative on demand growth. We only have a million barrels per day of demand growth next year because we are very bearish the economy when it comes to Europe, even the U.S. So we just have growth in Asia. China only starts to open up in our numbers from April next year. But even with that, we see an incredibly tight market because of the supply side.
Jason Bordoff [00:49:01] And just to reflections on what you just said, I’m curious if you agree with the inferences I’m making. But you talked about even if the price cap is not adopted by large buyers like China and India, if Russian oil is able to find other homes but has to travel a much longer distance to get there, you would imagine people would. That’s going to impact the price at which they can sell it. And to the extent you want to impact Russia’s revenue, but allow, as the deputy treasury secretary said here at Columbia last week, make sure that supply can continue to come to the market so we don’t all pay much higher prices. Maybe it has some helpful impact in that direction. And then and then second, I just wanted to put a fine point on what you said, because I think it’s quite consequential, the possibility that U.S. production, shale production plateaus. The the discussions in the last decade about how geopolitically consequential this shale revolution is. You often heard people say things like, you know, we wouldn’t be able to sanction Iran, but for the shale revolution, it’s because look at how much we can offset that lost supply. It gives us more geopolitical leverage. And one thing I’ve written often is what was consequential about it was not how big it was. We were producing ten rather than 5 million barrels a day. It was the delta. It was the growth rate. It was the fact that it was growing so quickly and in response to price changes could ramp up and down more quickly than conventional supply. If that element of shale goes away again, whether we plateau at five, ten or 15 million, you don’t have that same impact geopolitically, even though it’s still consequential as a source of energy supply in the world, to be sure.
Amrita Sen [00:50:38] No, I completely agree with you and this is why I keep coming back to for sure we can get more SPR releases and that would make our price forecast not come true. Right. If the U.S., for instance, came out with another 100 million barrels. But here’s the problem. You’re depleting what has taken, like we know, decades to build up in just two years pretty quickly. And I think, again, to your point, the delta is what matters. We think it’ll plateau. Exxon, US crude production plateaus at around the record highs of 13 million barrels per day. But then if we are not growing that, whereas demand is continuing to grow, that’s when you need supplies from the rest of the world. Right after you’ve exhausted the incremental growth, you have a couple of projects in Guyana and a little bit in Brazil. It again goes back to OPEC nations and then there’ll be pressure. Do we talk about, again, lifting sanctions on Iran and then there’s Venezuela. So, yes, exactly. To your point, it is so consequential in terms of the geopolitical nature of it as well, not just. In terms of, you know, where we plateau and what the level is. And this is also why running down the SPR so quickly, which might just again put pressure on the administration to have to refill it. Right. And potentially even at a higher price.
Jason Bordoff [00:51:55] This has been a pretty near-term focused conversation. In our remaining minutes, I want to ask you to look longer term and the question about OPEC and how much supply we need and why people want why OPEC countries might have cut production. One response to that might be this is this may be true for the next couple of years, but we’re having an energy transition. We’re moving away from oil, electric vehicle sales rate growth rates are tremendous. And I’m just wondering if you agree with that longer term outlook for oil markets and and what does that mean for the very influential role that we’re seeing dominant petro states like those in OPEC played today? Is this the last gasp of a dying petro state to try to capture as much revenue as one can? Because soon we’re going to be transitioning and oil demand is going to be falling and falling and falling.
Amrita Sen [00:52:46] So, look, we have a big energy transition service and we look at this on a daily basis, right? We’re just updating our kind of medium term numbers. And every time we have the same conversation, which is around, guess what? Oil demand is still not declining even in our kind of 1020 year outlook. So of course, we have oil demand growth peaking. We have gasoline demand peaking in 2027, diesel in the kind of mid thirties, but aviation and petrochemicals continues to propel oil higher. It’s very hard even out to 2050 for us to kind of get oil demand down much below 100 million barrels per day. The problem is, let’s assume let’s assume that oil demand does go below 100 million barrels per day instead of 110. Right. Like if let’s assume in the next five, six years, it grows, goes up, and then it will come back down. So the delta is we lose call that 10 million barrels per day from the peak. We still need to invest $550 billion at least each year just to hold production flat at 100 million barrels per day. The problem is the people who are not investing are the international energy companies because of shareholder pressure and the focus on energy transition. And then if U.S. shale is also starting to peak. How are petro states or essentially national oil companies not going to be relevant? They are the only ones investing. And I think that’s the I would argue, when I’m talking to some of the European Polish politicians as well. That’s almost the short sightedness of energy transition that first and foremost, look, our view is that we are going to require all forms of energy. Right. For sure, renewables is going to be the biggest winner, but we will need gas as well. And I think the crisis right now shows that as well. And we will also have oil, and particularly in Asia and Latin America, you know, they can simply move away from coal towards gas and achieve all their net zero targets without even really changing a lot in their oil mix. And yet you actually keep seeing all demand’s going to peak. Sure, growth is going to peak, but we’re not going to get oil demand collapse by 50 million barrels per day. Right. But that’s the fundamental problem, that if you still need a base level of oil, it is only the national oil companies that are investing right now.
Jason Bordoff [00:55:05] Yeah, I mean, it’s worth acknowledging, I think, that if we’re still using 100 million barrels of oil a day in 2050, even if you’re optimistic about carbon capture, we have pretty massively missed our our climate goals. So so is. Oh, absolutely. At least worth highlighting the implications of the scenario you’re describing. Do you sense that that potential for a transition, a faster or slower transition, whatever it is, But how much is that the idea that you were mentioning earlier, Gulf countries, particularly Saudi Arabia, want to see a higher price today? How much is the possibility of a transition affecting how they think about price levels today and markets today? Or is that sort of seen as pretty far in the future unlikely to get there?
Amrita Sen [00:55:47] No, no, they do look at this and this is why I was kind of making the distinction that none of them want a very high oil price because they do think that could really, you know, get even take up to go even faster. Now, having said that, I think everybody does now realize the issues with lithium and just generally the mineral side of it as well, that something like that is potentially going to cap the uptake in. All right. Just the production of EVs. But even if I leave that to one side, this is why I do think they are quite proactive at not wanting to get prices out of control. How do you define that? Is a 200 and 4050. That’s a separate conversation. But there is a belief as well that you need a minimum price for investment. And that’s that’s the really hard bit, to be fair to them that nobody gives them credit for, is that it’s a fine line, right? Is it 90? Is it 80 that you need a minimum price to invest, incentivize investment because they also don’t want a price spike? Because if you get a price spike, you are absolutely going to kill oil demand sooner rather than later. Right. And it’s that fine balance that they’re trying to effectively thread that needle. And that’s not always easy. But $90 for them is just not high enough for demand destruction. And we would agree with that. All our numbers suggest it has to be well north of hundred and 20, and in some cases for diesel, it’s well above 160 because it’s so inelastic. So I think that’s where that’s how I would characterize their vision of oil prices. They absolutely don’t want a spike, but they want a basic floor as well.
Jason Bordoff [00:57:20] That’s really well, well said and a good summary as we think about how to facilitate this transition, because we’re seeing a unfolding climate crisis and and try it and trying to navigate that now in the midst of an energy crisis. Oil, a central component of that, although certainly not bad as bad the market as looking at European gas markets or electricity markets or something else but important not just for the climate and the transition is important for politics and in in the US and elsewhere, important, economically important geopolitically. And we saw that with the response to the to the meeting in Vienna and to OPEC’s recent production cut. So I’m reading them. Thank you for joining us to explain to us what is happening in oil markets and in oil geopolitics. I appreciate.
Amrita Sen [00:58:01] It. Thanks for having me. It was a lot of fun talking to you, Jason. Thank you so much.
Jason Bordoff [00:58:05] Thank you. Amrita, thank you again. And thanks to all of you, our listeners, for joining us on this episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University. The show is hosted by me, Jason Bordoff, and by Bill Loveless. The show is produced by Erin Harnick, Steven Lacy and Cecily Mazer martinez from Post Script Media. Additional support from Kaushik, Deb, Marianne Carr, Karen Young, Daniel Prop, Natalie Volk and Kyu Lee. Greg Vill Frank engineered the show. For more information about the podcast or the Center on Global Energy Policy, visit us online at Energy Policy, Columbia dot edu or follow us on social media at Columbia U Energy. And please, if you feel inclined, give us a rating on Apple Podcasts. It really helps us out. Thanks again for listening. We’ll see you next week.
The group of 23 oil-producing countries known as OPEC+ announced a cut in production at its recent meeting in Vienna. The move sparked a sharp backlash from leaders in Washington amid concerns about high energy prices and their impact on the global economy.
OPEC+ countries, particularly Saudi Arabia, defended the decision by pointing to the weak economic outlook depressing oil demand. Others concluded geopolitics may have been at play given the relationship between OPEC+ countries and Russia.
In Washington, calls for retaliation were immediate. Proposals included a cessation of arms sales to Saudi Arabia, legislation to strip OPEC+ of its immunity from antitrust lawsuits, or new releases from the Strategic Petroleum Reserve.
Was the market in need of a production cut? And how much did geopolitics play a role in OPEC+’s decision?
This week host Jason Bordoff talks with Amrita Sen.
Amrita is the co-founder and chief oil analyst at Energy Aspects. She leads their analysis and forecasting of crude and products markets. Amrita was formerly the chief oil analyst at Barclays Capital. She holds a masters in economics from the University of Cambridge and a PhD in economics from SOAS University of London.
Amrita’s deep understanding of the complexity of the global energy sector, along with a wealth of industry contacts and experience, gives her a unique perspective on market outlook. Earlier this month, she warned clients that U.S. shale output could peak in 2024.
Together, Jason and Amrita discuss the rationale behind the OPEC+ cuts and the influence of geopolitics. They also talk about the U.S. response and production outlook for the next few years.
For more than three decades, the UN’s Intergovernmental Panel on Climate Change has prepared comprehensive scientific assessments about the drivers and risks of climate change.
Earlier this month, OPEC+ leaders Saudi Arabia and Russia announced further voluntary production and export cuts, with the former alone accounting for nearly half of the OPEC+ aggregate.
National oil companies (NOCs) produce about half of the world’s oil and own the bulk of oil and gas reserves. They are also large issuers of bonds held by international financial institutions. Their ESG risks should be a matter of great concern.