The explosive growth of U.S. shale production has capped gains of international and U.S. oil prices, offsetting OPEC’s production cuts in the first half of the year and contributing to an emerging oil glut in the latter half in 2018.
OPEC has now forged a new pact with its Russia-led non-OPEC allies to contain the oil price decline to $50 a barrel Brent—a price that is not enough to balance any budget of a Middle Eastern oil producer.
But the consequences of rising U.S. light oil production from the shale fields have also rippled through international oil flows and trade, making OPEC’s heavyweights such as Saudi Arabia fight for keeping market share in their most prized market and the world’s fastest-growing oil consumption region, Asia.
Thanks to the booming shale production, U.S. light oil exports have increased, taking market shares out of the lighter grades that Saudi Arabia and its fellow OPEC members are exporting to Asia.
Moreover, increased crude oil production in the U.S. has also resulted in higher oil product exports which, combined with higher Chinese refined product exports, have created an oversupply of products in Asia, crashing refining margins earlier in December.
U.S. crude oil production has been breaking records in recent months, according to data from the U.S. Energy Information Administration (EIA). Total U.S. petroleum exports have also been setting records over the past year, EIA data shows.
U.S. light crude oil exports to Asia have also grown and even with China shunning American crude, U.S. sales to OPEC’s key market Asia have held relatively steady since August this year, according to data from Kpler compiled by Bloomberg. Related: Low Oil Prices Could Cripple Texas Job Growth
As OPEC is getting ready for another round of production cuts beginning January, Saudi Arabia for example is hell-bent on keeping its market share in Asia and has recently slashed the January prices of all its grades going to Asia, while it raised the prices for all grades bound for the U.S., Northwest Europe, and the Mediterranean. Saudi Aramco’s deepest cuts in Asian pricing were for the Super Light and Extra Light grades, slashed by US$2 and $1.50 a barrel from December’s prices, respectively. The official selling prices (OSPs) of Arab Light, Medium, and Heavy were also cut, by between $0.40 and $1.00 a barrel.
The deepest cuts in the lighter grades reflect Saudi Arabia’s effort to keep its market share in Asia as competition from U.S. light oil intensifies, according to analysts.
“Lights are [cut] very aggressively,” a sour crude oil trader told S&P Global Platts in early December, commenting on the Saudi pricing for Asia for January.
“Guess they are trying to prevent too much US arb inflow,” the trader said.
Saudi Arabia and other OPEC members also have to contend with increased refined product exports out of the U.S., as well as China, which are creating a glut of gasoline and naphtha, depressing refining margins in Asia.
Related: ExxonMobil Faces Off With Venezuela’s Navy
In early December, the gasoline refining margin at the Singapore hub, viewed as a benchmark for Asia, slumped to a loss and to the lowest level against Brent prices since November 2011. Loss-making gasoline margins weighed on Asia’s overall refining profits, which hit in early December their lowest since August 2016, despite crumbling crude oil prices, according to data from Refinitiv Eikon, as carried by Reuters.
China is reportedly raising its fuel export quota for 2019 by 13 percent, which could additionally weigh on product oversupply.
ADVERTISEMENT
According to data compiled by Bloomberg, this year average monthly U.S. exports to Asia of light distillates—including gasoline and naphtha—have been nearly triple the export levels over the past two years.
The gasoline and other oil products glut comes just as OPEC and allies start the new production cuts of 1.2 million bpd. Faced with U.S. competition of lighter grades in Asia, OPEC and its largest producer Saudi Arabia are fighting hard for their market share in their prized export destination.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
- Is Solar Growth Really Lagging?
- Canadian Rig Count Slumps At Year-End
- The Mediterranean Pipeline Wars Are Heating Up
How could US shale oil challenge OPEC’s dominance in the Asia-Pacific region when OPEC’s exports to the region amounted to 16.2 million barrels a day (mbd) in 2018 compared with 2.0 mbd for the United States.
Moreover, claims about explosive growth of US shale production are pure hype reminiscent of the excessive hype by the US Energy Information Administration (EIA) and the International Energy Agency (IEA). The EIA’s claim that US oil production reached 11.7 mbd in 2018 is overstated by at least 3 mbd made up of 2 mbd of liquid gases and 1 mbd of ethanol all of which don’t qualify as crude oil. In fact International exchanges around the world don’t consider them as substitutes for crude oil. And if the International exchanges don’t accept them as substitutes, then they are not crude. Therefore, US oil production could have been no more than 8.7 mbd in 2018.
The slump in oil prices since November has little to do with US shale oil production and far more to do with the following four factors. The first is the realization by the global oil market that US sanctions have so far failed to cost Iran the loss of even one barrel from its oil exports and therefore there will not be a supply deficit in the market despite projections by a majority of so-called analysts and investor bankers that Iran will lose between 500,000 b/d and 1.5 mbd.
Moreover, the issuing of US sanction waivers to eight countries who didn’t need them in the first place and who would have continued to buy Iranian crude waivers or no waivers was no more than a fig leaf used by the Trump administration to mask the fact that their zero oil exports option is out of reach and that the sanctions are deemed to fail.
The second factor is that the global oil market has never re-balanced by the time Saudi Arabia (under pressure from President Trump) and Russia (for reasons of its own) jointly added 650,000 b/d to the market in June thus augmenting an already-existing small glut.
A third factor is that the escalating trade war between the US and China has created some uncertainty in the global economy thus slowing to some extent the global demand for oil.
A fourth factor is US manipulation of oil prices through the EIA’s falsifying claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar opposite other currencies. This malpractice has been exposed to the world a few days ago by Russia suggesting that there is a link between the recent slump in oil prices and the interest rate hikes of the dollar by the US Federal Reserve. This confirms what I have been saying for ages in my replies to articles posted on the oilprice.com.
To mitigate the impact of such malpractice, OPEC members could consider reducing if not cutting altogether all their oil exports to the US estimated at 3.2 mbd which have been augmenting US crude oil inventories. They could also adopt the petro-yuan in preference to the petrodollar since 80% of their oil exports go to the Asia-Pacific region particularly China. It is possible that Russia may lean on Saudi Arabia to drop the petrodollar and adopt the petro-yuan instead.
As for oil prices in 2019, all the ingredients for a rebound by oil prices are there. The global oil fundamentals are still robust with the global economy projected to grow at 3.8% in 2019 compared with 3.9% in 2018, the global oil demand is also projected to add 1.4 mbd in 2019 over 2018 and China’s demand for oil is unabated. In such market conditions, it wouldn’t be surprising if oil prices go beyond $80 a barrel in 2019.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London