How soaring US oil exports are transforming the global oil game from Dubai to Shanghai
How soaring US oil exports are transforming the global oil game from Dubai to Shanghai
First, sharp drops in US imports of crude oil eroded the biggest market that producers like OPEC had relied on for many years. Now, surging US exports – largely banned by Washington until just two years ago — challenge the last region OPEC dominates: Asia.
US oil shipments to China have surged, creating trade between the world’s two biggest powers that until 2016 just did not exist, and helping Washington in its effort to reduce the nation’s huge trade deficit with China.
The transformation is reflected in figures released in recent days that shows the US now produces more oil than top exporter Saudi Arabia and means the Americans are likely to take over the No.1 producer spot from Russia by the end of the year.
The growth has surprised even the official US Energy Information Administration, which this week raised its 2018 crude output forecast to 10.59 million bpd, up by 300,000 bpd from their last forecast just a week before.
When US oil exports appeared in 2016, the first cargoes went to free trade agreement partners South Korea and Japan. Few expected China to become a major buyer.
Data in Thomson Reuters Eikon shows US crude shipments to China went from nothing before 2016 to a record 400,000 barrels per day (bpd) in January, worth almost $1 billion. Additionally, half a million tons of US liquefied natural gas (LNG) worth almost $300 million, headed to China from the US in January.
The US supplies will help reduce China’s huge trade surplus with the US and may help to counter allegations from President Donald Trump that Beijing is trading unfairly.
“With the Trump administration, the pressure on China to balance accounts with the US. is huge... Buying US oil clearly helps toward that goal to reduce the disbalance,” said Marco Dunand, chief executive and co-founder of commodity trading house Mercuria.
As the energy exports rose, China’s January trade surplus with the US narrowed to $21.895 billion, from $25.55 billion in December, according to official Chinese figures released on Thursday.
The energy sales to China are still modest compared with the $9.7 billion of oil shipped by OPEC to China in January. But they are already cutting into a market dominated by the likes of Saudi Arabia and Russia — with the threat of much more competition to come.
“We see US crude as a supplement to our large base of crude” from the Middle East and Russia, said a refinery manager for China’s oil-major Sinopec, declining to be named as he was not cleared to speak to media.
He said that Sinopec was looking to order more US crude this year.
China’s crude imports climbed to a record 9.57 million bpd in January, official data showed on Thursday.
Meanwhile, US imports have fallen below 4 million bpd, against a record 12.5 million bpd in 2005.
At average December/January volumes, American oil and gas sales to China would be worth around $10 billion a year. Including exports to Japan, South Korea and Taiwan, the figure doubles.
US exports would be even greater but for infrastructure constraints: no US port can handle the biggest oil tankers, known as Very Large Crude Carriers (VLCC).
To address that, one of the biggest facilities in the Gulf of Mexico, the Louisiana Offshore Oil Port Services (LOOP), is expanding in order to handle VLCCs soon.
For Chinese buyers, the main attraction of US oil has been price. Thanks to the shale boom, US crude is cheaper than oil from elsewhere.
At around $60.50 per barrel, US crude is currently some $4 per barrel cheaper than Brent, off which most other crudes are priced.
For many established oil exporters like the Middle East-dominated OPEC or Russia, who have been withholding production since 2017 in an attempt to push prices higher, these new oil flows mark a big loss in market share.
“OPEC and Russia accepted that the US will become a big producer because they simply wanted to get the price where it is today,” Mercuria’s Dunand said.
Since the start of the OPEC-led supply cuts in January 2017, oil prices have risen by 20 percent, though prices in February have come under pressure again in large part due to soaring US output.
The flood of US oil may even change the way crude is priced.
Most OPEC producers sell crude under long-term contracts which are priced monthly, sometimes retro-actively. US producers, by contrast, export on the basis of freight costs and price spreads between US and other kinds of crude oil.
This has led to a surge in traded volumes of US crude futures, known as West Texas Intermediate (WTI), leaving volumes of other futures like Brent or Dubai far behind.
“Buyers, like sellers of US oil, started hedging WTI,” said John Driscoll, director of Singapore-based consultancy JTD Energy Services.
Despite all these challenges to the traditional oil order, established producers are putting on a brave face.
“We have no concern whatsoever about rising US exports. Our reliability as a supplier is second to none, and we have the highest customer base with long-term sales agreements,” said Amin Nasser, president and chief executive officer of Saudi Aramco, Saudi Arabia’s state-owned oil behemoth.
Gulf exporters to reap oil dividend as battle for Asia market share heats up
- Chinese exports to US fall
- IEA ups demand forecast
LONDON: China is expected to buy more oil from Saudi Arabia and other Gulf producers as it seeks to replace US supply amid a worsening trade war with Washington.
Although China last week omitted US crude from a list of a retaliatory tariffs, analysts told Arab News that the Chinese were cutting forward orders for US oil in case the trade war escalates.
Richard Mallinson, co-founder of London consultancy Energy Aspects, said: “Chinese buyers, anticipating that crude and LNG could go on the list if tensions escalate further, are looking to alternative sources.”
Mallinson said that Chinese buyers wanted to avoid having significant amounts of US oil sitting on tankers in the middle of the ocean, which would be hit with tariffs when unloaded at Chinese ports.
“There is definitely an opportunity for Middle East producers here, and particularly the biggest, Saudi Arabia,” he said.
Andrew Critchlow, head of energy news (EMEA) at S&P Global Platts, told Arab News that there was every likelihood of more demand from China for non-US oil and “Saudi Arabia and other Gulf Cooperation Council countries were the place to get it.”
OPEC already provides 56 percent of China’s oil imports, according to the International Energy Agency (IEA). The US has also been exporting increasing levels to the Asia powerhouse.
A report by the Houston Chronicle on Aug. 13, said that US crude exports to China surged from about 22,000 barrels per day (bpd) in 2016 to almost 400,000 bpd last year and early in 2018, accounting for about 20 percent of all US crude shipments.
This summer, those volumes fell below 200,000 barrels daily, said the report.
Critchlow said that the Kingdom was currently producing about
10.5 million bpd with spare capacity of around 2 million bpd, although the closer you get to that number, the more difficult it was to extract and process, he said.
Russia could also ramp up production, but not as much as KSA, said Critchlow.
“We now have the IEA upping its demand forecast for 2019. They have increased their OPEC barrels estimate by a few hundred thousand barrels a day and by half a million a day by 2019 (for the OPEC 15),”
But the scope for increased global export potential from the Gulf was also being driven by anticipated tighter supply after the reimposition of US sanctions against Iran later this year.
Still, there was a danger of demand erosion the longer the trade wars continued, and especially if there was further escalation.
Shakil Begg, head of Thomson Reuters oil research in London, warned that by the second half of 2019, global GDP could be cut if world trade levels contracted.
That would lead to a sharp fall in the price of crude, and even herald a US recession that could spill into Europe, he told Arab News.
But Critchlow made the crucial point that the big competition in the oil market today “is to win a bigger share of the Chinese and Asian market, including India.”
He said: “That’s where the battle for market share will take place over the next decade. Also, as Iranian barrels are lost, customers in nations such as China, South Korea, India and Japan will look to the GCC and others to step in.”
US exporters will still be a big force to be reckoned with, he said. The IEA has predicted that the US will overtake KSA and Russia as the largest producer by as early as 2019.
Mallinson said: “At the end of this year and the beginning of next, the market is going to get extremely tight. And the Saudis will have to pump at much higher levels.
“When you’ve got buyers restricted from where they go, it does create alternatives to move upwards,” said Mallinson.
But he warned that if the trade war worsens, it could hobble economic growth.
“These are the two largest economies in the world and it is not good news for them getting into a conflict like this.
“But even with a severe economic slowdown, we still see a tight oil market next year. Iran and sanctions are the biggest driver.”
Mallinson said that there were two other constraints: Underinvestment in capital projects outside the US, and infrastructure bottlenecks
“Those factors are big enough on the supply side to outweigh the possibility of a sharp slowdown of growth on the demand side,” he said.