Despite disagreements leading up to the June 22 meeting of OPEC in Vienna, the cartel and its Russian-led allies agreed to a ‘substantial output boost.’ It presents a victory to Saudi Arabia and Russia, the twin giants that have been the leading proponents of a supply hike over the past month, as the alliance sought to reassure markets that any shortfall in OPEC production will be made up within their ranks.
The framing of the new deal also allays Iran and Iraq’s concerns over appeasing US President Donald Trump’s concerns that oil prices were too high by framing it as a ‘return to 100% compliance’ rather than an official output boost. In practice, this should mean that since countries like Venezuela (and to a lesser extent Angola, Libya and Algeria) have been producing far less than their production quota due to various forms of disruptions, boosting them back up to agreed levels would achieve a natural gain of some 1 million b/d. The original deal brokered in November 2016 was for a cut 1.8 mmb/d, but disruptions in those countries have deepened it to 2.8 mmb/d over the past three months. Though there seems to be some disagreements between the Iranian and Saudi Arabian oil ministers, it seems that the pro-rata quota reallocations were not going to be strict since ‘some countries…. are not going to be able to produce’, allowing players like Saudi Arabia to step in to fill the gap.
The figures being bandied about are a one million barrel per day increase across OPEC and NOPEC, and a specific increase of 200,000 b/d for Russia within that figure. Saudi Arabia said it would increase output by ‘hundreds of thousands of barrels’ but exact figures would be decided later, implying a looser approach to the details and a focus on achieving the supply boost first and foremost. But more interestingly beyond the deal is the long-term implications of a cooperation entering its second year.
Both Saudi Arabia and Russia have been pushing for the creation of a new body, bringing together the 24 members of the OPEC and the NOPEC alliance under what is being called the OPEC+ umbrella. This would bring in countries like Malaysia, Oman, Bahrain, Kazakhstan and Mexico into a formal alliance with OPEC. For Russia, this is a sign of increased clout – given that the new body is said to give more voting power to large producers. For Saudi Arabia, it dilutes the influence of its rival Iran in world oil supply management, which has scuppered many deals in the past. A suggestion by Russia in Vienna that a ‘crude output deal’ for 2019 was already being planned implies that the creation of OPEC+ might be sooner rather than later. Saudi Arabia is said to already have offered to host talks for OPEC+ at home. The new body could prove to be as effective as OPEC has in the past; or it could fizzle out the way the Russia-led Gas Exporting Countries Forum has. Either way, the next six months in oil should be very interesting.
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Less than two weeks ago, the VLCC Navarin arrived at Tanjung Pengerang, at the southern end of Peninsular Malaysia. It was carrying two million barrels of crude oil, split equally between Saudi Arab Medium and Iraqi Basra Light grades.
The RAPID refinery in Johor. An equal joint partnership between Malaysia’s Petronas and Saudi Aramco whose 300 kb/d mega refinery is nearing completion. Once questioned for its economic viability, RAPID is now scheduled to start up in early 2019, entering a market that is still booming and in demand of the higher quality, Euro IV and Euro V level fuels RAPID will produce.
Beyond fuel products, RAPID will also have massive petrochemical capacity. Meant to come on online at a later date, RAPID will have a collective capacity of some 7.7 million tons per annum of differentiated and specialty chemicals, including 3 mtpa of propylene. To be completed in stages, Petronas nonetheless projects that it will add some 3.3 million tons of petrochemicals to the Asia market by the end of next year. That’s blockbuster numbers, and it will elevate Petronas’ stature in downstream, bringing more international appeal to a refining network previously focused mainly on Malaysia. For its partner Saudi Aramco, RAPID is part of a multi-pronged strategy of investing mega refineries in key parts of the world, to diversify its business and ensure demand for its crude flows as it edges towards an IPO.
RAPID won’t be alone. Vietnam’s second refinery – the 200 kb/d Nghi Son – has finally started up this year after multiple delays. And in the same timeframe as RAPID, the Zhejiang refinery by Rongsheng Petro Chemical and the Dalian refinery by Hengli Petrochemical in China are both due to start up. At 400 kb/d each, that could add 1.1 mmb/d of new refining capacity in Asia within 1H19. And there’s more coming. Hengli’s Pulau Muara Besar project in Brunei is also aiming for a 2019 start, potentially adding another 175 kb/d of capacity. And just like RAPID, each of these new or recent projects has substantial petrochemical capacity planned.
That’s okay for now, since demand remains strong. But the danger is that this could all unravel. With American sanctions on Iran due to kick in November, even existing refineries are fleeing from contributing to Tehran in favour of other crude grades. The new refineries will be entering a tight market that could become even tighter. RAPID can rely on Saudi Arabia and Nghi Son can depend on Kuwait, both the Chinese projects are having to scramble to find alternate supplies for their designed diet of heavy sour crude. This race to find supplies has already sent Brent prices to four-year highs, and most in the industry are already predicting that crude oil prices will rise to US$100/b by the year’s end. At prices like this, demand destruction begins and the current massive growth – fuelled by cheap oil prices – could come to an end. The market can rapidly change again, and by the end of this decade, Asia could be swirling with far more oil products that it can handle.
Upcoming and recent Asia refineries:
Headline crude prices for the week beginning 8 October 2018 – Brent: US$84/b; WTI: US$74/b
Headlines of the week
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production
As domestic production continues to increase, the average density of crude oil produced in the United States continues to become lighter. The average API gravity—a measure of a crude oil’s density where higher numbers mean lower density—of U.S. crude oil increased in 2017 and through the first six months of 2018. Crude oil production with an API gravity greater than 40 degrees grew by 310,000 barrels per day (b/d) to more than 4.6 million b/d in 2017. This increase represents 53% of total Lower 48 production in 2017, an increase from 50% in 2015, the earliest year for which EIA has oil production data by API gravity.
API gravity is measured as the inverse of the density of a petroleum liquid relative to water. The higher the API gravity, the lower the density of the petroleum liquid, meaning lighter oils have higher API gravities. The increase in light crude oil production is the result of the growth in crude oil production from tight formations enabled by improvements in horizontal drilling and hydraulic fracturing.
Along with sulfur content, API gravity determines the type of processing needed to refine crude oil into fuel and other petroleum products, all of which factor into refineries’ profits. Overall U.S. refining capacity is geared toward a diverse range of crude oil inputs, so it can be uneconomic to run some refineries solely on light crude oil. Conversely, it is impossible to run some refineries on heavy crude oil without producing significant quantities of low-valued heavy products such as residual fuel.
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production
API gravity can differ greatly by production area. For example, oil produced in Texas—the largest crude oil-producing state—has a relatively broad distribution of API gravities with most production ranging from 30 to 50 degrees API. However, crude oil with API gravity of 40 to 50 degrees accounted for the largest share of Texas production, at 55%, in 2017. This category was also the fastest growing, reaching 1.9 million b/d, driven by increasing production in the tight oil plays of the Permian and Eagle Ford.
Oil produced in North Dakota’s Bakken formation also tends to be less dense and lighter. About 90% of North Dakota’s 2017 crude oil production had an API gravity of 40 to 50 degrees. The oil coming from the Federal Gulf of Mexico (GOM) tends to be more dense and heavier. More than 34% of the crude oil produced in the GOM in 2017 had an API gravity of lower than 30 degrees and 65% had an API gravity of 30 to 40 degrees.
In contrast to the increasing production of light crude oil in the United States, imported crude oil continues to be heavier. In 2017, 7.6 million b/d (96%) of imported crude oil had an API gravity of 40 or below, compared with 4.2 million b/d (48%) of domestic production.
EIA collects API gravity production data by state in the monthly crude oil and natural gas production report as well as crude oil quality by company level imports to better inform analysis of refinery inputs and utilization, crude oil trade, and regional crude oil pricing. API gravity is also projected to continue changing: EIA’s Annual Energy Outlook 2018 Reference case projects that U.S. oil production from tight formations will continue to increase in the coming decades.