by Peter21 | Aug 7, 2017 | Uncategorized
Faced with the possibility of tighter sanctions on Venezuela, US refiners are switching to lighter crude slates and sourcing more heavy grades from Canada and Mexico. Asian refiners look set to reap the benefit.
The US government last week imposed sanctions on 13 Venezuelan officials, and further sanctions are likely to be imposed in the next few weeks by the administration of US president Donald Trump. Even if these do not result in an import ban on Venezuelan crude, refiners look set to wean themselves off these grades due to the risk of supply disruptions as civil unrest in the country mounts. Marathon Petroleum and Valero have already said that they would process more light and sweet crude oil in the next quarter, thus relying less on Venezuelan and Middle Eastern barrels.
US refiners look to Canada, Mexico
Venezuela depends on exports of crude oil and refined products for 95% of its revenue. Most of the Venezuelan crude oil imported by the US is processed on the Gulf Coast. The best alternative for these refiners will be Canada, which also produces heavy sour grades similar in quality to Venezuelan crude. However, pipeline constraints and railway transport will add up to $2.50/bbl to refiners’ average costs, at least in the early stages of intensified sanctions. Canadian benchmark West Canada Select (WCS) prices have surged – the discount to light sweet benchmark West Texas Intermediate (WTI) has narrowed to around $5 per barrel ($/bbl) in recent days. The price gap between the Midwest and the Gulf Coast could lead to higher profits for refiners in the Midwest at the expense of their Gulf Coast counterparts.
US crude imports from Venezuela have varied between 600,000-800,000 bpd in recent weeks, accounting for almost 10 percent of US requirements. Citgo Energy, the US refining arm of Venezuelan state-run PDVSA, Valero Energy, Phillips 66, Chevron and PBF Energy have been the key buyers of Venezuelan crude in 2017. The crude slate at BPF’s 190,000-bpd Chalmette Refinery in Louisiana has been more than 90% Venezuelan oil in recent years, while crude processed in Phillips 66’s 145,000 bpd Sweeny refinery in Texas and Valero’s 370,000-bpd St. Charles refinery in Louisiana has predominantly been from Venezuela.
Although Mexico would benefit from less competition from Venezuelan crude oil on the US Gulf Coast, its exports to Asia and Europe would suffer. Mexico has traditionally exported nearly two thirds of its crude oil to the US. Other Latin American oil producers would also benefit from an import ban on Venezuelan oil but their overall production has been declining in recent months. Any increase in Middle Eastern crude oil exports to the US is likely to be marginal because of OPEC/ non-OPEC production cuts.
US service companies such as Halliburton and Schlumberger are expected to leave Venezuela completely due to sanctions. The companies announced in 2016 that they would be curtailing their business activity in the country, although this decision appears to have been triggered in part by PDVSA’s tardiness in making payments to service firms.
Middle Eastern crude oil grades face more competition
Surplus Venezuelan crude oil supplies are expected to be sold in Asia, primarily China and India. This has the potential to widen the discount of Middle East marker crude Dubai’s to North Sea Brent by 20 to 40 cents/bbl. Middle Eastern crude oils that are similar in quality to Venezuelan crude include Arab Heavy from Saudi Arabia and Basrah Heavy from Iraq. These grades will suffer, although the impact is reduced by OPEC production cuts which have significantly reduced supplies of heavy fuel oil-rich grades. Increased exports from Venezuela into Asia would be accompanied by a fall in the region’s imports from countries such as Mexico.
Venezuelan oil exports to India could hit 1 million bpd if the country stops exporting to the US. Reliance and Essar have the main Indian beneficiaries of heavy crude oil from Venezuela. Russia’s Rosneft, which receives Venezuelan oil in return for loans, will benefit from its 49% share of Essar Oil. PDVSA reportedly owes India’s ONGC Videsh about $600 million in late dividends for their joint crude oil project at San Cristobal. The Venezuelan state oil company is now settling these debts by dedicating exports of 17,000 bpd for this purpose. Rising Venezuelan exports could reduce Indian refiners’ interest in Canadian crude. State-owned Indian Oil Corporation (IOC) acquired its first cargo of US and Canadian heavy crude in July this year, as medium and heavy sour supplies from the Middle East have dried up.
China will also profit from additional deliveries from Venezuela. China’s indigenous oil production has suffered hugely in the wake of lower oil prices. Venezuela’s exports to China to service debts owed to the country have almost doubled since oil prices collapsed from their mid-2014 highs above $100/bbl.
Venezuelan imports to worsen economic woes
The debt burden will get worse if the US applies sanctions on the Andean nation. Venezuela also imports gasoline and US light sweet crude oil for blending with its own heavy crude oil. Caracas will have to pay a higher price for gasoline imports and would be forced to source light crude from long-haul suppliers such as West and North Africa, if sanctions prevent it from taking US light sweet crude. Given the country’s spiralling debt burden, this could intensify the social and economic problems it faces.
Venezuela needs to blend its crude with that from countries such as Libya, Algeria and Nigeria to reduce the concentration of impurities such as metals and salt. Naphtha has also been used to improve the quality of Venezuelan crude oils. PDVSA could replace US naphtha supplies with European supplies but once again would have to pay higher freight. Similarly, US gasoline can be substituted by the European material while diesel can be sourced from the Middle East or Russia, but again at higher cost.
Conclusions
US sanctions against Venezuela are expected to be supportive of global crude oil prices, particularly if the political instability results in supply disruption, or to a perception that Venezuela has become an unreliable supplier. Unless this happens, however, Venezuelan crude oil supplies will simply be redirected towards Asia, increasing the competition for Middle Eastern grades, but doing nothing to reduce global oil stocks. Heavy sour crude differentials would come under pressure, but outright prices would be little affected.
by Peter21 | Jul 12, 2017 | Uncategorized
The price differential between light sweet crude oils and heavier sour crudes has narrowed as OPEC and several non-OPEC oil producers’ continue to implement output cuts. Rising sweet crude production in Libya, Nigeria and the US have also contributed to exceptionally narrow sweet/sour differentials, leading refiners in the West to process more sweeter grades in their refineries.
The Brent/Dubai EFS has remained below $1/bbl for several months, while Urals in Europe is now trading at the narrowest discount against Dated Brent since November 2014. In the US, Mars is trading at a discount of less than $1/bbl to US benchmark West Texas Intermediate (WTI). At these levels, it does not pay to process too much medium and heavy sour crude, especially in the West as fuel oil demand in the Atlantic basin is falling.
OPEC agreed to implement production cuts of nearly 1.8 million bpd with a group of non-OPEC countries from January 2017, and the last OPEC meeting in May agreed that the cuts would be extended until March 2018.
Asia has been hit hard by OPEC production restraint, which have choked off its main source of medium and heavy sour crude oil supplies. Refiners in the East are either resorting to sweeter grades or buying spot barrels from other regions, as interregional spreads tighten. Indian refiners have already developed an appetite for Russia’s main export grade Ural. Now, they are switching to Mars. The state-owned Indian Oil Corporation (IOC) is bringing a VLCC carrying 1.6 million bbl of the US grade along with 400,000 barrels of Western Canadian Select (WCS) to its refineries.
Unlike in the West, fuel oil demand is still relatively healthy in Asia. Therefore, the East is unlikely to replace medium and heavy sour crude with sweeter crude. However, higher sweet crude processing in several parts of the world is further stretching the already tight fuel oil market. New sophisticated refineries in Asia and the Middle East are not capable of producing as much fuel oil as older and simpler refineries.
While sour crude supplies have been reduced significantly, oil storage tanks are brimming with light sweet supplies especially in the Atlantic Basin. Continued low oil prices prompted the Energy Information Administration in the US to revise down its production growth forecast for US shale oil recently to 310,000 bpd from its previous forecast of 320,000 bpd. However, the rising rig count is a harbinger of further production additions next year.
Libyan output has surpassed the 1 million bpd mark, the highest level since June 2013. Nigerian exports in August are expected to reach 2 million bpd. Indeed, OPEC might ask these African nations to limit their supplies but only if they continue to increase.
The upshot for OPEC and non-OPEC oil producers is that a cut of more than 1.5 million bpd of sour production has been replaced with a similar volume of sweet crude oil from Libya, Nigeria and the US. Sour crude availabilities could be hit further if geopolitical problems in Venezuela persist.
Some medium sour stocks are being drawn down to make up for production cuts but once these have been absorbed, the sour market will tighten further. This will impact gasoil and fuel oil supplies as medium and heavy sour crudes have higher middle distillate and heavy distillate yields.
This could mean that fuel oil supplies remain tight even after the peak demand period during the northern hemisphere summer, despite lower cooling demand.
Moreover, heating fuel supplies could be stretched especially if the winter is harsh. There are already signs of higher middle distillate demand. India is sucking up more and more diesel due to strong economic growth. European economies are recovering, resulting in higher diesel demand, while shale oil producers require more diesel to allow them to maximize oil production.
These are all ingredients which point to higher oil prices at the end of this year.
Ehsan Ul-Haq
by Peter21 | Sep 14, 2016 | Uncategorized
The article below appeared in the September 14th, 2016 edition of Natural Gas Daily, a specialist newsletter published by Interfax, focussed on the global natural gas and LNG industry.
The International Energy Agency (IEA) has said that the pace of global oil demand growth is dropping more quickly than initially predicted. In its latest monthly outlook, the agency lowered its forecast for oil demand growth in 2016 by 100,000 barrels per day, to 1.3 million b/d. It forecast the growth rate would be even lower in 2017, at 1.2 million b/d.
With OPEC producers pumping at close to record-high levels, the stock overhang that has stymied oil price rallies in recent months looks set to continue. Non-OPEC production has been dropping because of low prices, but not by enough to eat into bloated inventories. The IEA estimated that oil inventories in OECD countries hit a new record high in July, of 3.1 billion barrels, a rise of 32.5 million bbl from the previous month.
Oil prices rallied from four-month lows of around $41.50/bbl in early August to a high of $51.22/bbl on 19 August as peak summer demand for oil for transport kicked in. But the rally has faltered, and Brent futures currently stand at around $47.50/bbl. The northern hemisphere summer is usually a time when more oil is consumed – especially in the United States, where motorists guzzle nearly 10% of the oil used globally.
The IEA said OPEC crude production nudged higher in August, to 33.47 million b/d. This was 930,000 b/d above levels seen earlier in the year and was led by Middle East producers pumping at full throttle. The IEA said Kuwait and the United Arab Emirates hit their highest-ever output and Iraq also increased supplies.
Saudi Arabia and Iran have each raised their output by more than 1 million b/d since late 2014, when OPEC shifted its strategy to defend its market share rather than protecting prices. Saudi output has almost reached a historic peak while Iran has also reached a post-sanctions high. As Saudi Arabia had planned, the surge in its production has stolen market share from US shale producers. However, the slowdown in US shale production has been slower than expected as a result of lower costs and higher well productivity.
In its latest monthly report, which was issued on Monday, OPEC said that losses in non-OPEC supply would be less than expected in 2016, falling by 610,000 b/d rather than the 800,000 b/d decline it predicted earlier in the year. Additionally, it reported that non-OPEC production in 2017 would be 200,000 b/d higher than 2016 levels and that OPEC production of NGLs would rise by 150,000 b/d in 2017, to 6.43 million b/d. The OPEC report said third-party sources estimated its members pumped 33.24 million b/d in August, close to the recent production peaks.
The IEA’s own supply estimates are broadly similar to those of the oil cartel. The IEA expects non-OPEC supply to drop by 840,000 b/d this year, with high-cost producers hit particularly hard. However, growth will resume in 2017, with the IEA forecasting a 380,000 b/d year-on-year increase in oil production. Output gains are expected because North Sea fields that were shut for summer maintenance have now been brought back to full production, while Kazakhstan’s Kashagan field will also start producing again after extensive repairs. Eni has forecast production will recover to 360,000 b/d in 2017, above the level anticipated by the Kazakh government, the Financial Times reported.
“Supply will continue to outpace demand at least through the first half of next year,” the IEA said. “Global inventories will continue to grow […] As for the markets’ return to balance – it looks like we may have to wait a while longer.”
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