Global oil demand strong enough to absorb additional OPEC output

Russia and Saudi Arabia have proposed that OPEC and non-OPEC countries increase production by 1.5 million barrels per day. (Reuters)
Updated 19 June 2018
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Global oil demand strong enough to absorb additional OPEC output

  • Russia and Saudi Arabia have proposed that OPEC and non-OPEC countries increase production by 1.5 million barrels per day
  • Saudi Arabia and its Gulf allies have the capacity to raise output

VIENNA: Global oil demand is set to stay strong in the second half of 2018, an OPEC technical panel forecast this week, suggesting the market could absorb extra production from the group.
The Organization of the Petroleum Exporting Countries meets on Friday to decide output policy amid calls from major consumers such as the United States and China to cool down oil prices and support the global economy by producing more crude.
OPEC’s de facto leader, Saudi Arabia, and non-member Russia have proposed gradually relaxing production cuts — in place since the start of 2017 — while OPEC members Iran, Iraq, Venezuela and Algeria have opposed such a move.
Three OPEC sources told Reuters a technical panel — the organization’s economic commission — met on Monday to review the market outlook and present it to member countries’ oil ministers later in the week.
“If OPEC and its allies continue to produce at May levels then the market could be in deficit for the next six months,” one of the sources said.
Another source said: “The market outlook in the second half is strong.” Some countries including Algeria, Iran and Venezuela said at the panel meeting that they still opposed an output increase, one of the sources said.
Russia and Saudi Arabia have proposed that OPEC and non-OPEC countries increase production by 1.5 million barrels per day (bpd), Ecuador’s oil minister Carlos Perez said on Monday.
The move would effectively wipe out existing production cuts of 1.8 million bpd, which have helped rebalance the market in the past 18 months and lifted oil prices to nearly $80 per barrel from as low as $27 in 2016.
“There are other countries that do not want to reduce the cuts ... It’s going to be a difficult ... a tough meeting,” Perez said upon arriving in Vienna, where the 14-member OPEC is based.
OPEC’s second- and third-largest producers, Iraq and Iran, have said they would oppose output increases on the grounds that such moves would breach previous agreements to maintain cuts until the year-end.
Both countries would struggle to increase output. Iran faces renewed US sanctions that will impact its oil industry and Iraq has production constraints.
Two OPEC sources told Reuters that even Saudi Arabia’s Gulf allies Kuwait and Oman were against big, immediate increases in output.
One OPEC source said the Saudi proposal of a 1.5-million-bpd increase was “just a tactic” aimed at persuading fellow members to compromise on a smaller rise of around 0.5-0.7 million bpd.
Saudi Arabia and its Gulf allies have the capacity to raise output. Russia has also said that limiting supply for too long could encourage unacceptably high output growth from the United States, which is not part of the production agreement.
On Tuesday, the head of Russia’s second-largest oil firm Lukoil, Vagit Alekperov, said global production cuts should be halved and that Lukoil could restore its oil output levels within two to three months.
Commerzbank commodities analyst Carsten Fritsch said that given big differences in the positions of OPEC members, the Friday meeting was likely to be tough.
“Unanimity is needed for any OPEC decision. This recalls the June 2011 meeting, when OPEC was unable to agree on an increase in production to compensate for the outages ... in Libya,” Fritsch said.
“That meeting ended without any joint declaration. The then Saudi Oil Minister Ali Al-Naimi described it as the worst OPEC meeting of all time.”
Adding to the tensions, Iran and Venezuela continued to insist that OPEC on Friday debate US sanctions against the two countries, but the organization’s secretariat has rejected their requests, according to letters seen by Reuters.


Asia’s refining profits slump as Mideast exports surge

Updated 23 February 2019
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Asia’s refining profits slump as Mideast exports surge

  • Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India
  • However, overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs

SINGAPORE: Asia’s biggest oil consumers are flooding the region with fuel as refining output is exceeding consumption amid a slowdown in demand growth, pressuring industry profits.
Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India.
Yet overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs.
Compounding the supply overhang, fuel exports from the Middle East, which BP data shows added more than 1 million barrels per day (bpd) of refining capacity from 2013 to 2017, have doubled since 2014 to around 55 million tons, according to Refinitiv.
Car sales in China, the world’s second-biggest oil user, fell for the first time on record last year, and early 2019 sales also remain weak, suggesting a slowdown in gasoline demand.
For diesel, China National Petroleum Corp. in January said that it expected demand to fall by 1.1 percent in 2019. That would be China’s first annual demand decline for a major fuel since its industrial ascent started in 1990.
The surge in fuel exports combined with a 25 percent jump in crude oil prices so far this year has collapsed Singapore refinery margins, the Asian benchmark, from more than $11 per barrel in mid-2017 to just over $2.
Combine the slumping margins with labor costs and taxes and many Asian refineries now struggle to make money.
The squeezed margins have pummelled the stocks of most major Asian petroleum companies, such as Japan’s refiners JXTG Holdings Inc. or Idemitsu Kosan, South Korea’s top oil processor SK Innovation, Asia’s top oil refiner China Petroleum & Chemical Corp. and Indian Oil Corp., with some companies dropping by about 40 percent over the past year. Jeff Brown, president of energy consultancy FGE, said the surge in exports and resulting oversupply were a “big problem” for the industry.
“The pressure on refinery margins is a case of death by a thousand cuts ... Refinery upgrades throughout the region are bumping up against softening demand growth,” he said.
The profit slump follows a surge in fuel exports from China, India, Japan, South Korea and Taiwan. Refinitiv shipping data shows fuel exports from those countries have risen threefold since 2014, to a record of around 15 million tons in January.
The biggest jump in exports has come from China, where refiners are selling off record amounts of excess fuel into Asia.
“There is a risk for Asian market turmoil if (China’s fuel) export capacity remains at the current level or grows further,” said Noriaki Sakai, chief executive officer at Idemitsu Kosan during a news conference last week.
But Japanese and South Korean fuel exports have also risen as demand at home falls amid mature industry and a shrinking population. Japan’s 2019 oil demand will drop by 0.1 percent from 2018, while South Korea’s will remain flat, according to forecasts from Energy Aspects.
In Japan, oil imports have been falling steadily for years, yet its refiners produce more fuel than its industry can absorb. The situation is similar in South Korea, the world’s fifth-biggest refiner by capacity, according to data from BP.
Cho Sang-bum, an official at the Korea Petroleum Association, which represents South Korean refiners, said the surging exports had “triggered a gasoline glut.”
That glut caused negative gasoline margins in January.