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Last Updated: February 1, 2018
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China is now the world's largest crude oil importer


China surpassed the United States in annual gross crude oil imports in 2017 by importing 8.4 million barrels per day (b/d) compared with 7.9 million b/d of U.S. crude oil imports (Figure 1). China had become the world's largest net importer (imports less exports) of total petroleum and other liquid fuels in 2013. New refinery capacity and strategic inventory stockpiling combined with declining domestic production were the major factors contributing to the recent increase in Chinese crude oil imports.

Figure 1. Monthly U.S. and Chinese gross crude oil imports


In 2017, an average of 56% of China's crude oil imports came from countries within the Organization of the Petroleum Exporting Countries (OPEC). The share of Chinese crude oil imports from OPEC countries declined from a peak of 67% in 2012, while Russia and Brazil increased their market share of Chinese imports more than any other country, from 9% to 14% and from 2% to 5%, respectively (Figure 2). Imports from Russia, which passed Saudi Arabia as China's largest source of foreign crude oil in 2016, totaled 1.2 million b/d in 2017, while Saudi Arabia accounted for 1.0 million b/d. OPEC countries and some non-OPEC countries, including Russia, agreed to reduce crude oil production through the end of 2018, which may have allowed other countries to increase their market share in China in 2017.

Figure 2. Chinese crude oil imports by source


Several factors are driving the increase in Chinese crude oil imports. China had the largest decline in domestic petroleum and other liquids production among non-OPEC countries in 2016 and EIA estimates it will have had the second-largest decline in 2017. EIA estimates that total liquids production in China averaged 4.8 million b/d in 2017, a year-over-year decline of 0.1 million b/d (2%), and expects the decline to continue through 2019, according to EIA's January 2018 Short-Term Energy Outlook (STEO).


In contrast to declining domestic production, EIA estimates that Chinese growth in consumption of petroleum and other liquid fuels in 2017 was the world's largest for the ninth consecutive year, growing 0.4 million b/d (3%) to 13.2 million b/d. Crude oil import growth has been larger than consumption growth because of inventory building for strategic petroleum reserves. In addition, China has reformed its refining sector through liberalizing import and export restrictions. Since mid-2015, China granted crude oil import licenses to independent refineries in northeast China, which have since increased refinery utilization and crude oil imports.


Another factor contributing to increased Chinese crude oil imports is higher refinery runs, which increased by an estimated 0.5 million b/d in 2017 to 11.4 million b/d, driven in part by two refinery expansions in the second half of the year. A 260,000 b/d refinery in Anning in Yunnan province started operating in the third quarter of 2017. This refinery had been delayed several times because of tariff disputes with Myanmar, where crude oil primarily from Saudi Arabia first lands and is then piped to the Anning refinery. In Guangdong province, China National Offshore Oil Corporation (CNOOC) expanded capacity of its Huizhou refinery by 200,000 b/d, increasing its imports from various sources in the third and fourth quarters of 2017 (Figure 3).

Figure 3. Chinese crude oil import locations


Infrastructure expansions will likely contribute to further increases in Chinese crude oil imports. In January 2018, China and Russia began operating an expansion of the East-Siberia Pacific Ocean (ESPO) pipeline, doubling its delivery capacity to approximately 0.6 million b/d (Map – China Import Locations). According to trade press reports, as much as 1.4 million b/d of new refinery capacity is planned to open in China by the end of 2019. Given China's expected decline in domestic crude oil production, imports will likely continue to increase during the next two years.

Source: U.S. Energy Information Administration

U.S. average regular gasoline and diesel prices increase


The U.S. average regular gasoline retail price rose 4 cents from the previous week to $2.61 per gallon on January 29, 2018, up 31 cents from the same time last year. West Coast prices increased over six cents to $3.09 per gallon, Midwest prices rose four cents to $2.51 per gallon, Gulf Coast prices increased nearly four cents to $2.35 per gallon, East Coast prices increased three cents to $2.59 per gallon, and Rocky Mountain prices increased one cent to $2.48 per gallon.


The U.S. average diesel fuel price rose nearly 5 cents to $3.07 per gallon on January 29, 2018, 51 cents higher than a year ago. Midwest prices increased by six cents to $3.03 per gallon, Gulf Coast prices increased over five cents to $2.87 per gallon, West Coast prices rose nearly four cents to $3.43 per gallon, East Coast prices increased over three cents to $3.11 per gallon, and Rocky Mountain prices rose one cent to $2.97 per gallon.


Heating oil prices increase, propane prices decrease


As of January 29, 2018, residential heating oil prices averaged $3.22 per gallon, 1 cent per gallon higher than last week and 59 cents per gallon higher than last year's price at this time. The average wholesale heating oil price for this week averaged $2.27 per gallon, almost 7 cents per gallon higher than last week and 58 cents per gallon higher than a year ago.


Residential propane prices averaged nearly $2.60 per gallon, 1 cent per gallon less than last week but 20 cents per gallon higher than a year ago. Wholesale propane prices averaged $1.17 per gallon, 11 cents per gallon less than last week but almost 23 cents per gallon higher than last year's price.


Propane inventories decline


U.S. propane stocks decreased by 0.9 million barrels last week to 53.1 million barrels as of January 26, 2018, 7.9 million barrels (12.9%) lower than the five-year average inventory level for this same time of year. Midwest, Gulf Coast, and Rocky Mountain/West Coast inventories decreased by 0.8 million barrels, 0.2 million barrels, and 0.1 million barrels, respectively, while East Coast inventories increased by 0.2 million barrels. Propylene non-fuel-use inventories represented 5.5% of total propane inventories.

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OPEC+ Prevails, For Now

The week started off ominously. Qatar, a member of OPEC since 1960, quit the organisation. Its reasoning made logical sense – Qatar produces very little crude, so to have a say in a cartel focused on crude was not in its interests, which lie in LNG – but it hinted at deep-seated tensions in OPEC that could undermine Saudi Arabia’s attempts to corral members. Qatar, under a Saudi-led blockade, was allied with Iran – and Saudi Arabia and Iran were not friends, to say the least. This, and other simmering divisions, coloured the picture as OPEC went into its last meeting for the year in Vienna.

Against all odds, OPEC and its NOPEC allies managed to come to an agreement. After a nervy start to the conference – where it looked like no consensus could be reached – OPEC+ announced that they would cut 1.2 mmb/d of crude oil production beginning January. Split between 800,000 b/d from OPEC members and 400,000 b/d from NOPEC, the supply deal contained a little bit of everything. It was sizable enough to placate the market (market analysts had predicted only a 800,000 b/d cut). It was not country-specific (beyond a casual mention by the Saudi Oil Minister that the Kingdom was aiming for a 500,000 b/d cut), a sly way of building in Iran’s natural decline in crude exports from American sanctions into the deal without having individual member commitments. And since the baseline for the output was October production levels, it represents pre-sanction Iranian volumes, which were 3.3 mmb/d according to OPEC – making the mathematics of the deal simpler.

Crude oil markets rallied in response. Brent climbed by 5%, breaking a long losing streak, as the market reacted to the move. But the deal doesn’t so much as solve the problem as it does kick the can further down the road. A review is scheduled for April; coincidentally (or not), American waivers granted to eight countries on the import of Iranian crude expire in May. By April, it should be clear whether those will continue, allowing OPEC+ to monitor the situation and the direction of Washington’s policy against Iran in a new American political environment post-midterm elections. If the waivers continue, then the deal might stick. If they don’t, then OPEC+ has time to react.

There are caveats as well. OPEC members, who are shouldering the bigger part of the burden, said there would be ‘special considerations’ for its members. Libya and Venezuela -  both facing challenging production environments – received official exemptions from the new group-level quota. Nigeria, exempted in the last round, did not. Iran claims to have been given an exemption but OPEC says that Iran had agreed to a ‘symbolic cut’ – a situation of splitting hairs over language that ultimately have the same result. But more important will be adherence. The supply deals of the last 18 months have been unusual in the high adherence by OPEC members. Can it happen again this time? Russia – which is rumoured to be targeting a 228,000 b/d cut – has already said that it would take the country ‘months’ to get its production level down to the requested level. There might be similar inertia in other members of OPEC+. Meanwhile, American crude output is surging and there is a risk to OPEC+ that they will be displaced out of their established markets. For now, OPEC remains powerful enough to sway the market. How long it will remain that way?

Infographic: OPEC+ December Supply Deal

  • OPEC – 800,000 b/d cut from Oct 2018 levels, Saudi Arabia to cut 500,000 b/d
  • Non-OPEC – 400,000 b/d cut from Oct 2018, Russia to cut 228,000 b/d
  • Total – 1.2 mmb/d cut from Oct 2018, Saudi Arabia and Russia to cut 728,000 b/d
December, 15 2018
Your Weekly Update: 10 - 14 December 2018

Market Watch

Headline crude prices for the week beginning 10 December 2018 – Brent: US$62/b; WTI: US$52/b

  • Crude prices strengthened at the start of this week, with OPEC delivering an agreement that will see production across the OPEC+ alliance decline by 1.2 mmb/d beginning January 2019
  • Two-thirds or 800,000 b/d of the cut will be borne by OPEC – with most of it taken up by Saudi Arabia – while the non-OPEC group will take up a cut of 400,000 b/d, most of which will be taken up by Russia
  • Skepticism has reigned before the supply deal was reached, as the first day of the OPEC meeting in Vienna closed without consensus and the threads holding OPEC together showed some stress when Qatar decided to quit the group
  • Crude prices were also boosted by Libya declaring force majeure at its largest oil field at El Sharara over arm protests, while Canada’s Alberta province announced plans to pare back some 325,000 b/d of output to ease a huge glut
  • The coordinated supply deal by OPEC ‘was not easy’ according to UAE Minister of Energy and Industry, with Iran in particular balking at being asked to sign up to a symbolic cut; this might not augur well for future supply deals that might be necessary given current trends
  • However, the supply cut will only last until April 2019, when the terms are due for a review, which would give OPEC+ enough time to consider and deal with the expiration of American waivers for eight countries over continued import of Iranian crude in May
  • Meanwhile, America became a net oil exporter for the first time in almost 75 years, as the unprecedented boom in US crude oil fuelled by the shale revolution powers on, a development that could dilute OPEC+’s attempt to support global crude prices
  • The recent weakening of WTI prices saw the US lose 10 active oil rigs last week, however, the addition of 9 new gas rigs led to a net loss of only 1 in the Baker Hughes active US rig count
  • Crude price outlook: OPEC+’s decision might have provided some relief, but may not be enough to keep crude oil prices trending upwards. Expect prices to moderate to US$60-61/b for Brent and US$50-51/b for WTI

Headlines of the week

Upstream

  • ExxonMobil’s winning streak in Guyana continues, as it announces its 10th offshore discovery at the Pluma-1 well, boosting estimated recoverable resources in the Stabroek block by almost 1 mmb/d to over 5 mmb/d
  • Apache has initiated production at the Garten field in the UK North Sea, with an output rate of 13,700 b/d and 15.7 bcf/d of natural gas
  • Chevron has raised its capital expenditure for the first time since 2014 into US$20 billion, with a major focus on expanding operations in the Permian Basin as well as on the Tengiz megaproject in Kazakhstan
  • Canada’s Alberta province, weighed down by a supply glut caused by pipeline bottlenecks, has announced moves to reduce the region’s output by 325,000 b/d
  • Equinor and Faroe Petroleum have agreed to trade a number of assets in the Norwegian Sea and the Norwegian Continental Shelf North Sea, encompassing the Njord, Bauge Hyme, Vilje Ringhome, Marulk and Alve fields, with the deal described as a ‘balanced swap’ in terms of value with no cash consideration

Downstream

  • CNPC’s US$9.53 billion joint venture integrated 400 kb/d petrochemicals/refinery project with PDVSA in Jieyang, China has been reactivated, and is now expected to begin operations in late 2021
  • French president Emmanuel Macron has backtracked and suspended a planned fuel-tax hike, after weeks of violent riots by the so-called Yellow Vests grassroot groups of up to 300,000 protestors
  • Limetree Bay Ventures has secured US$1.25 billion in financing that paves the way for the Limetree Bay refinery in the US Virgin Islands to restart after being idled for years, partnering with BP Products North America on the project

Natural Gas/LNG

  • Equinor has received permission from the Norwegian government to proceed with the development of Troll Phase 3, delivering an additional 2.2 billion boe/d of natural gas with a planned start-up timeframe of 1H2021
  • Shell has completed the construction of Gibraltar’s first LNG regasification facility, a small-scale project that will feed a new power plant in the territory
  • Trinidad and Tobago has agreed to allow BP and Shell to extend the operational life of the Atlantic LNG Train 1 in Point Fortin by five years, with the country receiving the ability to sell LNG cargoes through its state gas firm
  • Tokyo Gas and the Philippines’ First Gen Corporation have signed a joint development agreement to build and operate an LNG receiving terminal, as the three-horse race narrows over the country’s first LNG import facility
  • American LNG player Tellurian has agreed to supply trader Vitol with some 1.5 mtpa of LNG over 15 years from its 27.6 mtpa Driftwood LNG export terminal currently being developed in Calcasiue River, Louisiana
  • Tanzania is opening talks with Equinor and ExxonMobil to launch the East African nation’s first LNG project, likely to derive gas from the Equinor-operated offshore Block 2
  • Shell is expecting to produce its first cargo of LNG from its Prelude FLNG facility in Australia before the end of 2018
December, 14 2018
Permian’s Pipeline Lifeline

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

  • September 2018 – EPIC Midstream Holdings – 675,000 b/d, 1125km, 24-30’ diameter, 4Q19 target opening
  • November 2018, Wolf Midstream Partners – 500,000 b/d, 65km, 16’ diameter, 2H2019 target opening
  • November 2018, Jupiter Energy – 1 mmb/d, 1050km, 36’ diameter, 2020 target opening
  • December 2018, Plains All American Pipeline – 575,000 b/d, 830km, 26’ diameter, 3Q19 target opening
December, 04 2018