In a recent post we looked at the state of the crude oil market, how demand has been weak as a result of refinery maintenance closures in Europe and lower domestic consumption in China. Even though China is buying more crude, it has increased exports of refined oil products depressing prices in the Asian market and hurting regional refinery utilization rates.
A Crude Situation
The solution would be for crude oil producers to limit output, but with OPEC only controlling a third of world supply and no appetite among any of its member nations to reduce revenue streams, it seems voluntary reductions of any significance are unlikely. Saudi Arabia as the main swing producer is the most likely to adjust output and a report this week in the FT states output was reduced by 400,000 barrels per day in August from 10 million barrels per day to 9.6 m b/d, the fourth-largest one month drop on record.
At the same time, the kingdom is fighting for market share. A ThomsonReuters article reports Saudi Arabia has reduced its Arab Light blend official selling price by 5 cents per barrel to the regional Oman/Dubai market, bringing it to a US $1.70/barrel discount to September cargoes. This is the first time Arab Light has been at a discount to Dubai since November 2010.
So much for crude prices, what about refined products? If the world has an excess of crude – and with global inventory at 2.67 billion barrels, the highest in a year – it could be said to be awash in refined products. North American refiners are profitably running at decent utilization rates as they process low-cost US tight oil for the domestic market and a rising export market.
Something More Refined
European refiners are also running at acceptable margins and utilization rates and show little sign of significantly cutting output, so rising Middle East and Asian output is going to weigh on refined product prices in Q4.
Saudi Arabia is just about to bring onstream the second of two 400,000 b/d refineries at Yanbu on the west coast, following hot on the heels of the similar-sized Jubail refinery on the east coast which came onstream a year ago. The Saudis may have reduced crude exports last month but they will be looking to substitute that with refined product next month. Combined supply of crude and refined output will not change.
For the time being, the biggest casualties will be the Asian refiners facing increased supply from state-supported Chinese refineries and the new Middle East capacity, but gradually the surplus will make itself felt in Europe and beyond. The question is: will the usual rise in winter demand combined with possible (but probably limited) crude production cuts from OPEC be enough to support refined product prices this winter? Or will we see further price weakness?
What This Means For Oil Buyers
In our previous article, we pointed out the risk of possible rising crude prices from disruptions to what has been a benign supply market this year in spite of many potential threats. Even if crude price falls stabilize, however, refined products could continue to show weakness in the face of a growing surplus of refining capacity.