U.S. Oil Producers Eating Up Asian Market, And There’s Nothing OPEC Can Do

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Oct 30 2017
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OPEC, led by Saudi Arabia, and non-OPEC partners, led by Russia, is playing a simple but risky game. They try to game the world crude oil prices by controlling how many barrels of oil the world can get. They have agreed to take 1.8-million bpd (barrel per day) of oil off the market by cutting down their production. The plan was supposed to run until March 2018.


The plan works because when the market sees lesser oil in the market, the price increases as what a typical supply and demand 101 will tell you. The Brent crude oil skyrockets since middle of June, breaching the US$60 a barrel for the first time since 2015. Saudi Crown Prince Mohammed bin Salman has now agreed with Russian Vladimir Putin’s recent idea.


That idea was to let the output reduction runs throughout the end of 2018. U.S. crude inventories are near the lowest levels since January 2016, suggesting that the grand plan to drain global inventories is working fabulously. Understandably, both Saudi and Russia which remains highly dependent on oil and natural gas exports are happy and hope the price could go up further.

Russia President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman

Yet, optimism around surging oil prices comes with risks. And as mom always says – there’s no such think as free lunch. For now, there’s no other solution other than cutting down on production to create an impression the world’s oil inventories is decreasing. But there’re essentially 2 major problems, which Saudi and Russia probably knew but prefer not to acknowledge, at least for now.


The first issue is the “exit strategy” of the production-cut plan. What do Saudi and Russia plan to do after the plan runs out of its juice? How do they plan to return their production to the market? Like it or not, they have to announce a road map for a controlled ramp up of production in order to prevent panic that they would suddenly flood the market with oil.


It appears both OPEC and non-OPEC partners involved in the production-cut plan have not decide, let alone agree, to an exit strategy that would not disrupt the commodity market. If they do it too slow, the OPEC could lose further market share. But if they do it too quick, the price might plunge – once again. Either way, they have to do it – the right way!

US Oil Production Shale Producers - President Donald Trump

In fact, the U.S. oil producers have actually started eating up their market share, whether they realize it or not. The U.S. crude output remains above 9.5 million barrels a day and rose by the most since 2012 in the week ended October 20, the clearest proof that while OPEC was busy ensuring fully compliance to the production-cut, the U.S. happily eats its share.


OPEC, especially the Saudis has every reason to be concerned. US cargoes are showing up more regularly in Asia, where major importers are eager to diversify their supply sources – a hot topic during the recent S&P Global Platts Asia Pacific Petroleum Conference in Singapore. Middle East crudes have been East Asia’s largest supply source, but that is changing.


South Korea, for example, may trim its dependency on Middle East crude supplies to “70% or below” from 84.9% in the first half of 2017. Japan’s largest refiner JXTG Nippon Oil & Energy, meanwhile, is also looking to boost flexibility in its crude oil procurements by reducing its term commitments. Everybody in Asia is seeking lower term crude imports from the Middle East.

US Oil Tanker at Port

When Prime Minister Narendra Modi paid a visit to President Donald Trump in June, it wasn’t just some empty talks and a bear hug. The Indian prime minister negotiated contracts to supply 3 Indian refineries with nearly 8-million barrels of crude oil. And on October 2, the first shipment of American oil arrived in India, carrying with it 1.6-million barrels of the commodity.


There’re plentiful of options on the table for Asian buyers, who are now pampered with a more diversified basket of crude oil on offer – but bad news to OPEC. John Driscoll, director of JTD Energy Services in Singapore and a former oil trader, said – “See it as a bigger buffet table for Asian refiners who have more supply options and sellers to engage with.”


Frankly, OPEC should have had seen it coming. In January 2016 (last year), after an absence of 40 years, a ship loaded with U.S. crude oil set sail for foreign shores, marking the return of America as the world’s latest oil exporter. And the U.S. hasn’t looked back ever since. For the week ending September 29, U.S. crude exports rose to a record 1.98 million barrels a day.

US Shale Drillers

Because the U.S. has too much excess of crude oil, the Yankees could afford to sell cheaper elsewhere including Asia. And due to OPEC’s production-cut project, the Arabs could only watch with anger. According to Ed Rawle, chief economist at Wood Mackenzie, exports from the shale producers alone may balloon to over 3-million barrels a day by 2022.


The Americans are taking advantage of Saudi-led OPEC and Russia-led non-OPEC partnership in controlling the production output to scope as much market share as they could. In June alone, Saudi reduced its oil exports to Asia by around 7 million barrels. Desperate for higher price, Saudi then cut another 520,000 bpd to Asia in September.


Perhaps Saudi finally realizes OPEC influence is finally over hence there’s no point fighting oil producer United States. The immediate objective is for a higher crude oil so that they could get highest pricing from Saudi Aramco’s IPO. They don’t care about market share anymore simply because they had fought a war which they lost – to the U.S. shale producers.

Saudi King Salman Sucking Up to US President Trump


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