The oil market may be underestimating Iran’s ability to disrupt oil flows in and out of the Middle East and its potential repercussions.
Consensus opinion has been dismissive of Iran’s recently renewed threats to block oil flows through the Strait of Hormuz in retaliation against US sanctions as pure bluster, especially in view of the heavy US military presence around the Persian Gulf. But an attack by the Iran-aligned Houthi rebels in Yemen on two Saudi oil tankers, which prompted Aramco to indefinitely suspend oil shipments through the Bab el-Mandeb strait from July 26, shows that Tehran has the other major chokepoint of the Arabian Peninsula within its reach as well.
Other Middle Eastern producers’ oil shipments through the Bab el-Mandeb, a narrow waterway that connects the Red Sea with the Arabian Sea, have remained normal and traders were expecting Saudi shipments to resume once the kingdom had made adequate security escort arrangements for its tankers. But it would be dangerous to discount the nuisance value of the Houthis, who have stepped up missile attacks against Saudi Arabia over the past several months, and who may be leveraged even more by Tehran amid an escalating war rhetoric with the US.
While the target of the Houthi rebels, who took over the government in Sana’a in late 2014, is Saudi Arabia, which backs the now exiled government of Yemen, an escalation of attacks in the Bab el-Mandeb strait or the Red Sea could bring all oil traﬃc through those waters to a complete halt.
The strait is a busy channel for crude and refined product shipments moving in both directions, north and south. An estimated 4.8 million b/d of crude and refined products flowed through the waterway in 2016, according to the US Energy Information Administration. The strait is also a conduit for Middle East crude and refined product shipments to Europe and the US through the Suez Canal and the SUMED pipeline to its north in Egypt, which connect the Red Sea to the Mediterranean Sea. Some 3.9 million b/d of crude and products passed through the Suez Canal in 2016, while the SUMED pipeline system has the capacity to move 2.34 million b/d of crude, according to the EIA.
Crude flows into and refined product exports out of the Yanbu and Rabigh refineries on the west coast of Saudi Arabia, each with a capacity of 400,000 b/d, also need access to the Bab el-Mandeb. Only the Yanbu refinery can receive Saudi crude from Jubail via an overland East-West pipeline system.
For Iran, targeting the Bab el-Mandeb and onshore Saudi oil installations through the Houthis provides wider access to the kingdom’s facilities as well as deniability, which it would not have, were it to attack the Strait of Hormuz on its own.
The crude market largely shrugged oﬀ the growing war of words between the US administration and Iranian leaders this week. But it will be forced to take notice if the Houthis escalate attacks against Saudi Arabia and maybe even its ally the UAE, or continue targeting ship movements through the Red Sea. Houthis claimed they attacked the international airport in Abu Dhabi using an armed drone that flew over 1,500 km to its destination on Thursday, though the UAE flatly denied such an incident occurred, while experts doubted that the rebels have such capability.
Though crude’s price recovery this week from the depths plumbed last week was also helped by a draw reported for last week in US crude and refined product stocks, the upside was limited. Two major bearish factors remain in view: increased supply from Saudi Arabia and a few other OPEC/non-OPEC producers, and a possible slowdown in oil demand if the US-China trade war continues to fester.
A potential supply shock if Washington adopts a tough stance against buyers of Iran crude may seem distant, given the November 4 implementation of US sanctions against Iran’s oil sector. But the Bab el-Mandeb attack this week shows oil supply could be jolted from other directions and at any time.
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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
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According to the Bangladesh Road Transport Authority (BRTA), the number of registered petrol and diesel-powered vehicles is 3,663,189 units.
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The demand for engine oils will rise keeping pace with the increasing automotive vehicles, with an expected 3% yearly growths.
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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.