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Despite crude oil production cuts, Saudi Arabian crude oil exports to some Asian countries have increased

The U.S. Energy Information Administration (EIA) estimates that during May 2019, Saudi Arabia’s crude oil production approached a four-year low, averaging an estimated 9.9 million barrels per day (b/d). Production declined more than 1 million b/d since its estimated all-time high production levels in October and November 2018 (Figure 1). Although the country’s total crude oil exports are also lower than recent highs, its crude oil exports to some Asia Pacific countries actually increased during the period of declining production. China in particular has increased its crude oil imports from Saudi Arabia, which is partially a result of new Chinese refining capacity. In contrast, U.S. crude oil imports from Saudi Arabia reached a 31-year low in February, with weekly estimates for April, May, and June suggesting even further declines.

Figure 1. Monthly Saudi Arabia crude oil production and exportsMonthly Saudi Arabia crude oil production and exports

Four Asia Pacific countries that publish crude oil imports by country of origin—China, Japan, South Korea, and Taiwan—collectively imported an average of 3.5 million b/d of crude oil from Saudi Arabia in 2018 (Figure 2). Chinese and Japanese 2019 year-to-date crude oil imports from Saudi Arabia are higher than their 2018 annual averages, whereas Taiwan’s are flat and South Korea’s have declined slightly. China’s crude oil imports from Saudi Arabia, in particular, have increased by 0.4 million b/d year-to-date through April compared with the 2018 annual average, significantly higher than Japan’s increase of less than 0.1 million b/d.

Monthly crude oil imports from Saudi Arabia for select Asia Pacific countries

In contrast, U.S. crude oil imports from Saudi Arabia have declined year-to-date through March 2019 compared with the 2018 average by more than 0.2 million b/d, averaging 0.6 million b/d for the first quarter of 2019. Weekly estimates through June 14 of this year show continued declines, indicating that imports from Saudi Arabia averaged less than 0.5 million b/d in May and the first half of June. As a result of these shifts in crude oil flows, the U.S. share of total Saudi Arabian crude oil exports fell to 9% in March, and China’s share increased to 24% (Figure 3). Collectively, the United States, China, Japan, Taiwan, and South Korea historically accounted for about 60%–65% of total Saudi Arabian crude oil exports.

Figure 3.Monthly share of Saudi Arabian crude oil exports

These recent changes in crude oil trade patterns are partially because of long-term structural trends within China and the United States, but they are also a result of recent oil market dynamics. From 2010 through 2018, EIA estimates total Chinese petroleum consumption has increased from 9.3 million b/d to 13.9 million b/d, whereas Chinese domestic production has increased from 4.6 million b/d to 4.8 million b/d. As a result, China’s need to meet incremental oil consumption has come primarily from imports. China’s crude oil imports from Saudi Arabia have gradually increased in recent years, and in March 2019 reached the highest level for any month since at least 2004, at 1.7 million b/d. Other countries, including Russia and Brazil, have had larger increases in crude oil export growth to China, however, with Russia overtaking Saudi Arabia as the largest source of crude oil on an annual average basis in 2016.

U.S. crude oil imports, on the other hand, have steadily decreased during this period as domestic crude oil production has increased. In addition, U.S. crude oil imports from members of the Organization of the Petroleum Exporting Countries (OPEC) have declined, in particular, following increases from other countries such as Canada. Canadian crude oil can substitute for certain OPEC grades and have lower transportation costs when shipped by available pipeline capacity.

Saudi Arabian crude oil exports to China increased recently at least in part as a result of the startup of a new 0.4 million b/d refinery in Dalian, Liaoning Province, which has a supply agreement with Saudi Aramco, Saudi Arabia’s national oil company. Saudi Aramco also has a supply agreement with another 0.4 million b/d refining and petrochemical complex in Zhejiang Province, which started trial operations this year.

Other near-term developments, however, could reduce the volume of Saudi Arabian crude oil headed to China for May, June, and through the summer. Saudi Arabia typically increases domestic crude oil consumption in the summer months because the country directly burns the fuel for power generation. Although Saudi Arabia has gradually been increasing the use of fuel oil and natural gas instead of crude oil for power generation, the seasonal increase is dependent on the weather and can still amount to several hundred thousand barrels per day in additional domestic consumption during summer months. The five-year (2014–18) average crude oil burn for electric power generation peaks in July at 0.7 million b/d, an increase of 0.3 million b/d from the April average. In addition, Chinese crude oil refinery demand could be lower in the second quarter of 2019 than in the first quarter of 2019. Bloomberg data suggest that Chinese refinery outages in May and June month-to-date were 2.1 million b/d and 1.7 million b/d, respectively, 0.5 million b/d and 0.6 million b/d higher than their respective five-year averages for those months.

Recent global oil supply issues could keep Saudi Arabian crude oil exports to China, Japan, South Korea, and Taiwan relatively high in the coming months, however, in spite of the previously mentioned seasonal factors. These four countries were all initially granted Iranian sanctions waivers through May 2019. However, because waivers were not renewed, each country will likely need an alternative to Iranian crude oil. This development could keep their crude oil imports from Saudi Arabia near first-quarter 2019 levels for the coming months as a partial substitute for Iranian barrels. Saudi Arabia’s support of maintaining current OPEC production cuts or increasing output levels in the upcoming late-June or early-July OPEC meeting will be a critical determinant for future export flows.

U.S. average regular gasoline and diesel prices fall

The U.S. average regular gasoline retail price fell more than 6 cents from the previous week to $2.67 per gallon on June 17, 21 cents lower than the same time last year. The Midwest price fell nearly 8 cents to $2.54 per gallon, the West Coast price fell nearly 7 cents to $3.45 per gallon, the East Coast price fell more than 6 cents to $2.56 per gallon, the Rocky Mountain price fell nearly 4 cents to $2.91 per gallon, and the Gulf Coast price fell nearly 3 cents to $2.34 per gallon.

The U.S. average diesel fuel price fell nearly 4 cents to $3.07 per gallon on June 17, more than 17 cents lower than a year ago. The West Coast and Midwest prices each fell nearly 5 cents to $3.67 per gallon and $2.96 per gallon, respectively, the Rocky Mountain price fell more than 4 cents to $3.07 per gallon, the East Coast price fell nearly 3 cents to $3.10 per gallon, and the Gulf Coast price fell more than 2 cents to $2.82 per gallon.

Propane/propylene inventories rise

U.S. propane/propylene stocks increased by 3.3 million barrels last week to 74.5 million barrels as of June 14, 2019, 10.7 million barrels (16.8%) greater than the five-year (2014-2018) average inventory levels for this same time of year. East Coast, Midwest, and Gulf Coast inventories each increased by 1.1 million barrels. Rocky Mountain/West Coast inventories fell slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 6.6% of total propane/propylene inventories.

China Crude oil exports imports international Japan Saudi Arabia South Korea United States USA
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September, 21 2019
Your Weekly Update: 16 - 20 September 2019

Market Watch  

Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b

  • Global crude oil prices surged at the start of the week as news that a successful drone strike on the Abqaiq processing plant and the Khurais oil field in Saudi Arabia took out over half of the Kingdom’s crude production capacity
  • Brent prices jumped above US$70/b at one point on fears on global supply disruption, but abated as President Donald Trump authorises the release of US strategic petroleum reserves to cover the market
  • Initial fears that the Saudi Arabian crude output would be crippled for months proved to be extreme, with Saudi Aramco announcing that some 70% of capacity at Abqaiq had been restored within days
  • But more worryingly is that this incident escalates the risk of a full-blown military confrontation with Iran; the US was quick to accuse Iran of the attack, citing data on the attack, which was denied by Iran
  • Yemen’s Iran-backed Houthi rebels claimed responsibility for the attack, although initial results of a Saudi investigation pointed to the weapons originating from Iran
  • For now, crude oil prices have retreated as the risk of widespread supply disruption abated, but tensions are still high in the region
  • This comes after President Trump signals that he was considering easing sanctions in an apparent thaw in the US-Iran relationship; this opportunity now appears to have evaporated
  • Saudi Arabia’s new oil energy minister, Prince Abdulaziz bin Salman, made a positive impression at the recent OPEC+ meeting, with errant members of the group signalling that they were now ready to adhere to the supply deal
  • In Venezuela, the oil crisis continues as ongoing US sanctions now mean that the country cannot find enough vessels to transport its crude, as shippers fear losing insurance coverage if they transport Venezuelan oil
  • Iran has released the UK-flagged Stena Impero vessel that it had impounded, a lone bright spot in a region now clouded by geopolitical tensions
  • Against this backdrop, the US active rig count recorded yet another fall, losing five oil and seven gas rigs for a net drop of 12 to a new total of 886 rigs
  • With the shock of the Saudi drone attacks abating, crude oil prices are retreating back to their previous range – US$60-63 for Brent and US$56-59/b for WTI – as the impact of global supply was minimised; another attack, however, might cause a more permanent shift in prices


Headlines of the week

Upstream

  • Equinor has received consent from the Norwegian Petroleum Directorate to continue operations at the Tordis and Vigdis fields through 2036 and 2040, respectively, extending the life of the North Sea fields by 34 years
  • BP has announced that it will deploy continuous measurement of methane emissions for all future oil and gas projects in a bid to reduce emissions
  • CNOPC and Niger have agreed to collaborate on a 1,892km pipeline to carry oil from Niger’s Agadem rift basin to port facilities in Benin
  • The South African government is tabling a new law that will allow the state to take a free stake of up to 10% in all new oil and gas ventures, hoping to capitalise on a surge in upstream interest after Total’s Brulpadda discovery

Midstream/Downstream

  • As the IMO deadline for low-sulfur marine fuels approaches, refiners have begun stockpiling supplies of very low-sulfur fuel oil to ensure adequate supply; this includes Japan’s Cosmo Oil that aims to begin supplying VLSFO to the domestic marine market by October 2019
  • IndianOil’s Gujarat refinery stated it ready to produce 12,900 b/d of VLSFO by October while its Haldia refinery will start producing 5,500 b/d of VLSFO by December; this should be adequate to cover the India’s marine fuel demand
  • India is considering selling a stake in BPCL, the country’s second largest refiner, to an international firm to boost competition in downstream fuel retailing that has historically been dominated by state firms
  • Valero Energy and Darling Ingredients are launching the first renewable gasoil plant in Texas, focusing on producing renewable diesel and naphtha
  • In the UK, Essar Oil’s Stanlow refinery aims to increase its diet of US crude from a current 35% to 40%, leveraging on cheaper American oil
  • The after-effects of Russia’s contaminated crude through the Druzhba pipeline continues as Total issues a tender to sell 1.3 million barrels of tainted Ural crude through Rotterdam after failing to process it

Natural Gas/LNG

  • Poland has won a ruling from the EU courts to reduce Russian control over the key EU Opal pipeline that carries Russian gas from the Nord Stream link to Germany, preventing Gazprom from using most of Opal capacity in a bit to increase energy security for Eastern European countries
  • Vitol and Mozambique’s state player ENH have set up a new joint venture in Singapore to capitalise on trading opportunities for LNG, LPG, and condensate
  • Australia’s Liquefied Natural Gas Ltd and Delta Offshore Energy will supply gas from the Magnolia fields to an LNG-to-power project in Bac Lieu, Vietnam
  • Eni’s Baltim South West gas field offshore Egypt has started up production, only 3 years after discovery, producing an initial 100 mscf/d of gas
  • US gas player Sempra is looking to take FID on its Energia Costa Azul LNG project in Mexico’s Baja California region by the end of 2019
  • Egypt has announced that it expects to receive first natural gas from Israel by end-2019 through the East Mediterranean Gas pipeline, with initial supplies of 200 mscf/d that will rise to 500 mscf/d by 2020
  • The Independence floating LNG terminal in Lithuania – built to reduce the Baltic region’s dependence on Russian gas – is set to receive its first-ever cargo from Siberia, likely from Novatek’s LNG projects in Yamal
September, 20 2019
Financial Review: Second-Quarter 2019
Key findings
  • Brent crude oil daily average prices were 9% lower in second-quarter 2019 than in second-quarter 2018 and averaged $68 per barrel
  • The 117 companies in this study increased their combined liquids production 4.6% in second-quarter 2019 from second-quarter 2018, and their natural gas production increased 5.0% during the same period
  • Nearly half of the companies were free cash flow positive—that is, they generated more cash from operations than their capital expenditures
  • Dividends plus share repurchases were nearly one-third of cash from operations, slightly lower than the six-year high set in first-quarter 2019

Distributions to shareholders via dividends and share repurchases amounted to nearly 33% of cash from operations


See entire second-quarter review

September, 20 2019