After a rise, must come a fall. Chinese refinery runs in June 2017 reached the second highest level on record, jumping to 11.21 mmbpd, up from 10.98 mmbpd in May 2017 and up 2.3% y-o-y. Two of the highest monthly output statistics have occurred in the last nine months, the absolute highest being 11.26 mmbpd in December 2016. That’s a lot of fuel products sloshing around China, as the country moves into peak summer demand.
Possibly a little too much. Oil markets were roiled earlier this week as China announced its July production numbers. Output fell to 10.71 mmbpd, down by 500,000 barrels from June though marginally higher y-o-y by 0.4%. In absolute terms, that’s still a massive amount of fuel products. But lack of growth always spooks traders, particularly when China is involved, and that sent Brent and WTI some US$2/b lower. There was talk about how Chinese demand is slowing down, driving bearish concerns that the global supply glut will grow.
There is probably a small kernel of truth in that. Chinese demand has been slowing down, in relative growth terms. But that’s largely because larger growth jumps are harder to come by at higher levels of development - the potential for double digit growth has passed on to India; but even a 2% jump in Chinese demand is still massive in absolute terms, requiring an additional 1 million tons per month – or four more VLCCs. What is actually happening in China, however, is the same problem happening globally – oversupply.
Looking over data from the first six months of 2017, the jumps in crude throughput are linked to a recent phenomenon of independent ‘teapot’ refiners. Allowed to import crude for the first time last year, these private players have been responsible for the recent sterling growth in Chinese output. In the months where new import quotas in 2017 were granted, Chinese throughput soared. In the months when there were jitters about the quotas being granted, throughput was flat. Chinese state refiners have largely kept their throughputs flat y-o-y; all the growth has been from the teapots this year.
Perhaps too much growth. Less driven by concerns of national balances and more on immediate profits, it produced a major oversupply of fuels in China. Many of the teapots are petrochemical players, more interested in the naphtha portion of refining production, but still produce great amounts of gasoline and diesel in the process. Inventories reached record levels and even strong demand entering summer could not sap that. Much of this had been anticipated by the state refiners – they announced in June that some 10% of capacity will be shut down for maintenance in Q3, a necessary move to trim the overhang. Teapot production, however, may very well continue to max. Which is why the state refiners are also waging a war on two fronts with the independents – commercially, through a retail price war for market share that began in May, and institutionally, by lobbying the Chinese Politiburo to impose controls on the teapots as well as investigate them for tax and financial irregularities.
In many ways, this is the growing pains of the Chinese market developing. The teapots were allowed to flourish in China’s attempt to introduce competition in the refining industry. In a free market, this is what happens. Without the overarching national concerns that PetroChina and Sinopec face, the teapots’ approach to the industry to maximise profits. This development is symptomatic of nothing more than the Chinese refining industry adjusted to a new equilibrium. That’s the trouble with the free market sometimes – it will correct itself, but oftentimes it takes a little pain to get there. Even if that little pain is more drag on global crude prices.
P.S. for continuity of investments in the energy industry, making the right choices are key for future success. Read more about Scenario planning and the so what question a recent blog post by Henk Krijnen. Henk Krijnen will be in Kuala Lumpur this October 2017, presenting a very timely "Masterclass on Scenario Planning for Decision Making in the Energy Industry". Find out more https://goo.gl/tauq5x. If you are too busy during this period, check out our training series on “Training to Navigate Uncertainty in Oil & Gas”
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The Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
The engine oil market has grown up around 10 to 12% in the last three years because of various reasons, mostly because of the rise of automobiles.
According to the Bangladesh Road Transport Authority (BRTA), the number of registered petrol and diesel-powered vehicles is 3,663,189 units.
The number of automotive vehicles has increased by 2.5 times in the last eight years.
The demand for engine oils will rise keeping pace with the increasing automotive vehicles, with an expected 3% yearly growths.
Mostly, for this reason, the annual lubricant consumption raised over 14% growth for the last four years. Now its current demand is around 160 million tonnes.
The overall lubricants demand has increased also for the growth of the power sector, which has created a special market for industrial lubricants oil.
The lubricants oil market size for industries has doubled in the last five years due to the establishment of a number of power plants across the country.
The demand for industrial oil will continue to rise at least for the next 15 years, as the quick rental power plants need a huge quantity of lube oil to run.
The industries account for 30% of the total lubricant consumption; however, it is expected to take over 35% of the overall demand in the next 10 years.
Mobil is the market leader with 27% market share; however, market insiders say that around 70% market shares belong to various brands altogether, which is still undefined.
It is already flooded with many global and local brands.