“I am not sure there is a supply shortage,” Khalid al-Falih, the energy minister of the world’s top oil exporter and OPEC’s largest producer, Saudi Arabia, told Reuters in the middle of May, commenting on concerns that a growing number of supply outages may have tipped the market into deficit.
Al-Falih was quick to point out that Inventories are still building, especially in the United States.
Nearly at the same time, the International Energy Agency (IEA) reported that the global oil market saw an estimated 700,000-bpd surplus in Q1 2019.
Since the end of the first quarter, a number of supply issues have emerged - the U.S. ended all waivers for Iran’s oil exports, Venezuela’s production continues to dive amid a protracted political standoff and raging economic crisis, and Russian oil exports have declined due to contamination at a 1.4-million-bpd oil pipeline to Europe.
Is the oil market in short supply? This is the question that analysts, investors, and OPEC and its allies are trying to answer.
Yet, the answer is not as simple as a sum of all global supply - it depends on the type of oil. There’s a shortage of heavy and medium oil, and there’s a glut in light oil supply.
Although the total balance in terms of number of barrels could be viewed as more light barrels offsetting heavy oil shortage, this wouldn’t be a correct estimate because refineries designed to process heavier and sour crude won’t work with lighter grades.
Compared to the same time last year, total global oil supply was actually up in April this year - 280,000 bpd higher than in April of last year, according to estimates from the Energy Intelligence Group and Bloomberg, reported by oil strategist Julian Lee for Bloomberg.
However, compared to the end of 2018, total supply is down by 2 million bpd, exclusively due to lower supply of medium and heavy oil. Related: The Implications Of Falling Interest Rates For Energy Investors
In April 2019 versus April 2018, light oil supply jumped by 1.85 million bpd - mostly thanks to soaring U.S. oil production. Theoretically, this surge in light oil supply offset a 900,000-bpd drop in medium oil supply and a 670,000-bpd decline in heavy oil supply, with those declines due to plunging Venezuelan production and U.S. sanctions on its oil exports, lower Iranian exports, and OPEC’s cuts - where producers are withholding medium and heavy grades from the market.
Since the end of 2018, however, light oil supply hasn’t been able to offset the decline in heavy and medium crude supply. According to Bloomberg and Energy Intelligence Group estimates, light oil supply in April 2019 was up just 160,000 bpd compared to December 2018, while medium crude supply was down 1.52 million bpd and heavy oil supply dropped 640,000 bpd since the end of last year.
So, the answer to whether there is a shortage or not is a one that depends on who you’re asking. Consumers of light oil would say there’s glut, while buyers of heavy and medium would argue that the market is tight and set to become even tighter.
“[T]he OPEC+ deal, US sanctions against Iran and Venezuela and Alberta’s output cuts have significantly tightened supplies of medium-heavy oil. Compared to November, supply of these grades has fallen by nearly 3 mb/d,” the IEA said in its Oil Market Report on May 15, expecting medium-heavy supply to take another hit in coming months with the end of all waivers for Iran.
U.S. refiners are facing a shortage of heavy oil as they raise gasoline production for the driving season, analysts told Bloomberg last week. Refining margins in the U.S. Gulf Coast refineries are at a 2011 low, while tight supplies of Canadian oil could result in lower refinery run rates in the Midwest compared to the summer of 2018. Related: Downward Momentum Is Building For Oil
U.S. refiners are also expected to end up paying more for Mexico’s heavy sour Maya grade after U.S. President Donald Trump imposed tariffs on all imports from Mexico in an attempt to make it solve the illegal immigration issue.
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“With the current price of Maya around $63 per barrel, a 5 percent tariff will raise the price by more than $3 per barrel,” analytics firm ESAI Energy said in a market alert on Friday.
“This is more than the shipping cost to Asia, which means Mexico would sell barrels on to Asian buyers, especially China and India, rather than pay any of the cost of the tariff themselves. US refiners are likely to pay up given the lack of other heavy crude, but if not, then China and India will take advantage,” ESAI Energy notes.
By Tsvetana Paraskova of Oilprice.com
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