The Gift That Keeps on Giving: OPEC Free-for-All a Boon to Asia

Oil Falls Below $40 as OPEC Extends Glut
  • OPEC effectively abandons production quotas at Dec. 4 meeting
  • Cheap oil prices seen benefiting India, Philippines the most

The world’s biggest oil consumers could hardly have hoped for a better OPEC meeting.

QuickTake Oil Prices

The group that supplies most of Asia’s crude effectively decided to abandon production limits in the hope that unrelenting supply of cheap oil will squeeze out rivals. With prices trading near a six-year low amid swelling global stockpiles, a policy of continuing to flood the market gives little reason for a rebound in prices, according to IG Ltd.

While the collapse in crude has triggered the worst slump in the energy industry since the 2008 financial crisis, it’s been a boon for Asian economies dependent on imports, helping temper inflation, support household spending and bolster refining profits. After the Organization of Petroleum Exporting Countries decided that “everyone does whatever they want,” in the words of Iran’s oil minister, the benefits for Asia will probably continue.

“Big oil consumers will take a lot of succor and refiners will get good sleep,” H. Kumar, managing director of India’s Mangalore Refinery & Petrochemicals Ltd., said in a phone interview Monday. “There’ll be a lot of stability in the market.”

The Asia-Pacific region will consume 31.87 million barrels a day of oil in 2015, exceeding demand of 31.28 million barrels from the Americas, the International Energy Agency said in a report on Nov. 13. China, India, Japan and South Korea will be among the biggest users of oil, according to the Paris-based IEA.

India and the Philippines are likely to benefit the most because they depend heavily on crude imports, according to Bloomberg Intelligence analysis. Both economies also rely on consumer spending for growth and cheap oil typically gives households more money to spend. India’s 7.4 percent growth is the strongest among Asia’s emerging economies. while the Philippines has expanded at 6 percent year-on-year, according to BI.

“It’s probably the first time we’ve had such strong refining margins when oil is declining,” said Kim Woo Kyung, a spokeswoman for SK Innovation Co., South Korea’s largest refiner. “We are currently enjoying strong product margins, especially with gasoline, and we believe this will continue. Although we’ll see oil dropping temporarily below $40 a barrel, internally we believe $40 is the bottom line for oil.”

Good for Consumers

OPEC’s inaction is good for the region’s refiners such as Reliance Industries Ltd. Regional profits from turning crude into naphtha, which is used to produce gasoline as well as petrochemicals, have surged to the highest level since at least May, data compiled by Bloomberg show. Japan, Asia’s second-biggest oil consumer, spent an average of $47.88 a barrel in October for supplies, down from $113.47 in January 2014, according to data from the nation’s Ministry of Finance.

“This provides lot of relief for all big importing nations as this ensures stability in prices,” J. Ramaswamy, the finance head at India’s third-biggest state refiner, Hindustan Petroleum Corp., said in a phone interview. “This is good for consumers and also for refiners as it will stabilize refining margins.”

Malaysia, the region’s biggest oil exporter, may be hurt the most. As the price of crude collapsed, exports as a share of Malaysia’s economy fell to 73 percent, from 78 percent in June 2014, and the country’s current account surplus shrank, according to BI. While Indonesia is also one of the region’s largest crude exporters and rejoined OPEC this year after leaving in 2009, the boost to household spending will help offset the drag from lower export revenue, BI predicts.

‘Little Incentive’

The oversupply is likely to continue in the new year. Iran, for years under sanctions related to its nuclear program, has promised to lift its production to as much as 4 million barrels a day by the end of 2016.

“There still seems to be little incentive for the global supply-demand dynamic in oil to re-balance in the short-term,” Angus Nicholson, a Melbourne-based market analyst at IG, said in a Bloomberg TV interview.

West Texas Intermediate tumbled 2.7 percent after OPEC’s meeting and extended losses below $40 a barrel on Monday, dropping as much as 81 cents, or 2 percent, to $39.16 on the New York Mercantile Exchange. Brent crude in London slid as much as 1.3 percent to $42.46.

“Asia, which already bypassed North America as the biggest oil importing region in the world, should continue to be a big beneficiary of lower for longer oil prices,” said Gordon Kwan, a Hong Kong-based analyst at Nomura Holdings Inc.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE