Bellwether of the global market

The global petroleum market has gone through momentous changes in recent years, and oil producers in the Middle East are adapting to changes in their roles as traders. The Middle East may in fact be viewed as a bellwether for the condition of the global oil market, when one examines changes in the directions and volumes of crude and product flows.

With weakening demand among many of the largest importers, and the expansion of supply in North America, most Middle Eastern exporters must focus more on Asia. But there are limits to growth even in mighty Asia, and market competition is growing since Russia to the north is expanding its export infrastructure to reach further into Asia as well. The global oil market is growing more competitive, and Middle Eastern producers of necessity are working harder to compete.

Refined product output and exports

Saudi Arabia made history in the mid 1980s when it decided to move into export refining, building large new refineries designed to capture the value added of processing domestic crude. Saudi Arabian refining capacity doubled from 0.7 million bpd in 1980 to 1.4 million bpd in 1985, and current crude distillation capacity is approximately 2.5 million bpd. Neighbouring countries began to follow suit, launching their own refinery expansion programs. Middle Eastern crude refining capacity rose from approximately 4.5 million bpd in 1985 to 5.8 million bpd in 1995, 7.3 million bpd in 2005, and 8.8 million bpd in 2013. However, Middle Eastern refinery throughput has flattened recently. During the 2005 - 2013 period, throughput has remained in the range of 6.3 million - 6.5 million bpd. Weaker global demand is one cause. Yet there is a parallel to the situation with Middle Eastern crude exports falling as a percentage of global oil demand: Middle Eastern refining has lost ground relative to the rest of the world. The region’s throughput has declined as a percentage of global throughput. In 2011, the Middle East accounted for 8.6% of global throughput, but this fell to 8.3% in 2013.

This is occurring despite increases in refinery output of key fuels. Middle Eastern refiners have worked to boost gasoline production in response to surging demand across the region. In 1995, gasoline output was 674 000 bpd. This rose to 1.155 million bpd in 2013. Saudi Arabian gasoline production was369 000 bpd in 2013. Saudi Arabia was initially the largest producer of gasoline, but Iranian capacity increases have recently made it the largest producer in the Middle East, with output reported by OPEC at 456 000 bpd in 2013. Iran has several refinery expansion projects planned or underway that are geared to raise gasoline output even more dramatically.

Meanwhile, kerosene/jet fuel production has been variable, depending on factors such as demand for air travel and the price and availability of alternatives to household kerosene (which is often subsidised.) In 1995, kero/jet production was 670 000 bpd. Production has stayed generally in the range of 700 000 - 750 000 bpd, with recent growth to 787 000 bpd in 2012. Production was flat at 786 000 bpd in 2013. Kuwait is the leading producer of jet fuel in the region, with output of 188 000 bpd in 2013. The other key producers are Saudi Arabia, the UAE, and Iran.

Diesel production grew from 1.414 million bpd in 1995 to 1.813 million bpd in 2013, an increase of nearly 400 000 bpd. Saudi Arabia is the region’s largest producer of diesel, with an output of 602 000 bpd in 2013, down slightly from its level of 640 000 bpd in 2012. Iranian diesel output was 589 000 bpd in 2013.

The commissioning of Saudi Arabia’s new 400 000 bpd refinery at Jubail, known as YASREF (Yanbu Aramco Sinopec Refining Company) is certain to place additional product onto the market. This refinery, which is geared to process heavy crude from the Manifa field, was designed to produce 263 000 bpd diesel, 90 000 bpd of gasoline, 3000 bpd of benzene, and other products. The diesel is ultra low in sulfur, less than 10 ppm, and can move to Europe, the Americas, or Asia. This refinery is following on the heels of the 400 000 bpd SATORP (Saudi Aramco Total Refinery and Petrochemicals Company) refinery that was commissioned in September 2013. This refinery also is geared toward heavy crudes from Manifa and Safaniya fields. Full utilisation of both of these refineries could easily create regional oversupplies and reduce refinery margins, which in turn would exert further downward pressure on crude prices.

Middle Eastern product exports and destinations

Product exports flow mainly to the growth markets of Asia. In 2009, exports averaged 1.640 million bpd, and they rose to 2.683 million bpd in just four years. Product exports to Europe also have grown, though exports to the rest of the world have generally stagnated. Note that there are significant gaps and inconsistencies in the OPEC data on refined product exports by specific countries, though the information appears to be improving, and some additional detail is published for Kuwait and Saudi Arabia.

Kuwaiti product exports are shipped chiefly to Asia, with smaller volumes headed to Europe. Total product exports reached a peak of 900 000 bpd in 1998 before slumping to 572 000 bpd in 2002. Exports have been variable since then, but they rose to 809 000 bpd in 2013.

Saudi Arabia is the largest refined product exporter in the Middle East, and as noted, the 400 000 bpd SATORP refinery started exporting product in late 2013, and the 400 000 bpd YASREF refinery is now coming onstream as of late 2014. This should cause a surge in exports that would reverse the recent downturn. In 1996, product exports were 1.492 million bpd, but they dropped below one million bpd (994 000 bpd) in 2002 before recovering to 1.385 million bpd in 2005. From 2005 through 2013, however, product exports slid by 592 000 bpd, falling to 793 000 bpd in 2013. With 800 000 bpd of new refinery capacity new Saudi product exports are certain to have an increasing impact on product markets in 2014 - 2015.

Finding market outlets for new Middle Eastern product will be more of a challenge in the near term, however. European demand, as noted, is set for another modest decline, and European refinery utilisation is low. As US shale crude production has risen, refineries with access to the new crudes have raised their utilisation rates. The US has displaced some product imports as well as expanding product exports, leaving little room for Middle Eastern products. Persian Gulf product exports to the US have fallen dramatically. Saudi Arabia had historically been the largest exporter of product to the US, but its exports dropped to a mere 3000 bpd in 2013, and they have averaged 10 000 bpd during the first eight months of 2014. Qatar also is exporting 10 000 bpd of product to the US currently, while Bahrain is exporting 7000 bpd. Exports from Iraq, Kuwait, the UAE, Oman and Yemen have dwindled or vanished.

Conclusion

With its vast hydrocarbon reserves, government backed energy industry, and strategic location, the Middle East could never be considered irrelevant in the global oil market. Yet the region has lost ground recently in terms of global crude and product exports, and a number of governments are initiating changes in their market strategies.

Early November 2014 spot prices for crude have been dipping below US$ 80/bbl. Yet it remains to be seen if prices will fall to the level that they will shut in certain shale oil and gas developments, or other unconventional oil developments. It is difficult to say if there any such thing as ‘pent up demand’ for oil that would reappear if only the price of oil fell, and what price level would be required to tease this demand out into the open. On the supply side, the Middle East does retain a major advantage in terms of having the lowest production costs, so it is theoretically possible to out compete other producers. But once again, the question arises, how low would the price have to fall, and how long would prices have to remain low? Is it US$ 80/bbl? US$ 70/bbl? Or even US$ 50/bbl? At this price, is it in the best interests of Middle Eastern producers, or their customers?

Written by Nancy D. Yamaguchi.

Adapted for the web by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/12012015/bellwether-of-the-global-market-054/