April 7, 2023

Hi, I’m Alan Beaulieu with ITR Economics and this is TrendsTalk. Thank you for joining me today. Two minutes of your time to talk about the latest cut in oil production announced by OPEC Plus the other day. As you probably are well aware, there was already a 2 million barrel a day cut production plan for 2023 and they have announced an additional million barrels a day, bringing the cuts to 3.75% of demand, which is not devastating, but it would suggest that OPEC Plus, if they’re thinking economically, would be suggesting that there’s probably a pretty significant decline in demand coming. At least that could be their mindset or they could be looking to punish speculators or they could be looking to make a political statement, make a political move. This could be to help Russia. Who knows? There’s all kinds of funny things that could be going on here. But when I look at the reality of it, world industrial production is slowing in its rate of rise, Phase C, for those of you that know ITR and we are going to see a high in the 12-month moving average, late this year, that’s going to run through most of 2024.

Our forecast is that it’ll be peak to trough decline of about 1.5%, which makes it milder than normal, and there’s a nice tight correlation between world oil demand and world industrial production and that says that world oil demand is going to slow in its rate of rise, certainly phase C. And it may slow some in terms of the rate of rise to where it levels off, not likely to see a decline, if we look at the historical relationship, again, high correlation. So with all that said, when you see a lessening in the demand, you can see sometimes easing of price, but when you look at oil prices, West Texas Intermediate in this case, but Brent and WTI move a lot in common, what you find is that you can find an easing in demand and prices go up. You can find an easing demand and prices come down.

There’s no guarantee here that today’s prices of $80 plus a barrel are going to move astronomically higher to, as some have intimated, $100 a barrel and there’s nothing that says that they won’t relax a little after this fear wave has passed. My advice to you is just keep in mind that the outlook for the macroeconomic environment says easing in demand. It says no crisis. It says no reason to expect the world to fall apart or the oil industry to fall apart, just to be patient and wait and see how this develops as opposed to reaching for your life vest.

On the subject of life vests, Russia is certainly involved in this. They were part of the 2 million barrel a day reduction for 2023, but they’re not participating in the 1 million. They’re holding their production levels where they are, and I bet you they’re hoping for higher prices, so that they can see their cash revenues increase. Industrial production in, excuse me, in Russia on a deflated basis is well below year ago levels, 9.5% below year ago levels. That’s the lowest we’ve seen in over 12 years, and that certainly has to be a concern to the Kremlin. When we look at GDP, it’s also in recession. When we look at retail sales in Russia, on a deflated basis, the 12-12 is 6% below year ago levels, which is the lowest we’ve seen in six years and the 12-month moving total is in decline, also in recession. The leading indicator on a 1-12 basis in decline, Russia’s in trouble. Russia would very much like to shore up their economy and improve their cashflow, and perhaps this is a way for them to participate in a plan where they hope oil prices will go up. If they go up dramatically, it would certainly help. If they’re looking to make the West a scapegoat in this, well, they’re trying hard to do that, and they’re saying this is because of the banking crisis in the United States.

Crisis, really? If they’re looking to punish us for putting a cap on oil prices, this may or may not work. If they’re looking to, as a group, to punish speculators, it may or may not work. What you have to keep in mind is, this is not a foregone conclusion that prices are going to go up dramatically. It’s not a foregone conclusion that prices will relax as demand slows. Pay attention to what’s going on in your markets and what’s happening in your world. Pay attention to ITR when it comes to world futures prices and what’s going to happen with demand and production. As production falls, world rig activity can be expected to fall as production falls. You’re going to see less opportunities there if you work in the oil fields, invest in the oil fields, provide engineering services, sand, pipe. Whatever it happens to be, but overall, the economy is not looking like it’s going to take it on the chin, because of this. We’ll wait and see how it develops, but the early breaking news and the analysis is just keep going. Plan on slower growth in the United States and the world through 2023 and that very mild recession in 2024. I’m Alan Beaulieu. Thank you for joining me for this issue of TrendsTalk.