Asia: destination of choice for oil producers

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Asia: destination of choice for oil producers

By EESHA MUNEEB
SPECIAL TO THE NATION

 

WITH THE first quarter of 2017 under our belt, the oil markets are ruminating over several shifts in the underlying strata of the industry’s modus operandi.

 

For most of January and February, crude-oil benchmarks traded in a tight range, with ICE Brent fluctuating between about US$53-$57 a barrel up until March, while NYMEX (New York Mercantile Exchange) light sweet crude maintained a close correlation in a $50-$54 range over the same period.

 

Prices tumbled in March after the euphoria from unexpectedly high compliance by the Organisation of the Petroleum Exporting Countries (Opec) to its output cuts turned into wilful acceptance, as such things are bound to, and a bigger, more resilient issue came into the limelight – that of the almost juggernaut revival of US shale-oil production.

 

ICE Brent futures hit their lowest point of the year on March 22, settling at $50.64 a barrel, but have climbed back up since then to have settled at $52.96 on March 30.

 

NYMEX light sweet crude followed suit, falling to $47.34 a barrel on March 21 – with the ICE Brent/NYMEX crude spread widening to $3.62 a barrel on that day – but has since closed the gap |to settle at $50.35 a barrel as of March 30.

 

Extension of producer cuts

 

A handful of Opec/non-Opec producers – members of the monitoring committee – met in Kuwait on March 26 to conclude that they would keep observing supply and demand fundamentals for another month before deciding whether to extend the current output-cut deal beyond its June expiry.

 

The deal will officially be up for review at Opec’s next ministerial meeting on May 25 in Vienna.

 

Several committee members spoke out in support of an extension of the cuts, but the market barely batted an eyelash – not to continue in the same stead would be the real shocker; it almost seems to be taken for granted now that producers will be in favour of cuts.

 

The real challenge, as ever, is who will bear the brunt and how will the committee enforce it? So far, Saudi Arabia has led the pack, whittling January production down to 9.98 million barrels a day from 10.42mmbd in December, a 440,000-barrel-a-day decline, according to an S&P Global Platts survey. To put this in perspective, total production from Opec members declined by 690,000bpd between December and January, the survey showed.

 

Going forward, Saudi Arabia has sent clear signals that it will continue to scale back production and exports only if other producer countries comply with their allocated quotas.

 

Indeed, Saudi Energy Minister Khalid al-Falih’s notable absence from the March meeting was an unexpected twist, since the committee had said that the Saudi minister, who holds Opec’s rotating presidency and had attended the first committee meeting in January, would be participating.

 

Resilience of US production 

 

In the midst of this, US shale-oil production seems to be coming back without flinching at the drop in international crude-oil prices. The industry has leveraged on the memory of the oil-price plunge in 2014-2015 to introduce more sophistication into their businesses, namely by leveraging on hedging strategies to lock in profits well into 2018.

 

Add to this the fact that entire regions continue to improve break-even points with advances in drilling technology over time, making even the current low-price environment a profitable one in which to operate.

 

Depending on the yield from a well, current break-even prices are comfortably in the range of $30-$40 a barrel.

 

Platts Analytics Bentek Energy shows a similar Bakken break-even, at $33.69 a barrel for March, although that assumes lower drilling and completion costs at $5.3 million. Permian well break-evens are currently in the low $30s per barrel. Combined with timely hedges on the crude-oil forward curve, producers could continue drilling for years before feeling a pinch on their profitability.

 

Asian significance

 

As US production remains a strong contender at the forefront of global supply and Opec’s tussle for market share continues, Asia has become a region of key significance that sellers increasingly turned toward for oil demand in the first quarter of 2017.

 

The month of March saw a “festival of arbitrage” in terms of crude oil from conventional and unconventional routes flowing into Asian countries. A narrow Brent/Dubai EFS (exchange of futures for swaps) spread – a key indicator of ICE Brent’s premium to benchmark cash Dubai – has made Dubai-based crude grades less favourable and opened a plethora of options for Asian crude-oil buyers.

 

Despite heavy seasonal maintenance that will see more than 3mmbd of refining capacity shut from a total of about 32mmbd in the Asia-Pacific region during the first half of 2017, major Asian buyers such as China, Japan and South Korea – and even Thailand – have been buying crude from as far away as the US, Brazil, Mexico, West Africa and the North Sea.

 

Two Chinese state-run oil companies bought 5 million barrels or more of heavy sweet crude from Brazil for loading in March, according to a source with direct knowledge of the deals.

 

Similarly, a Southeast Asian end-user purchased a cargo of US Eagle Ford crude for delivery over May and June.

 

Thailand’s PTT bought around 400,000 barrels of the US crude from a Western trading house for delivery late this quarter, said a source with direct knowledge of the deal.

 

In addition, trade sources said a South Korean refiner and a Japanese company could have purchased a combined total of at least 2 million to 3 million barrels of unidentified light sweet US crude grade from an oil major for late second-quarter delivery. 

 

Mexican Isthmus crude was also heard to be making its way over to Japan, and Japanese refiner Idemitsu Kosan bought its first cargo of Angola’s Girassol crude since 2012 as well this year.

 

Up to seven VLCCs (very large crude-oil tankers) from the North Sea were also heard to be going to Asia this month, although not all the cargoes have been confirmed, and it appears the main destination for May West African crude-oil cargoes continues to be Asia, which trade sources cite as a function of a continued narrow Brent/Dubai EFS spread and cheaper freight rates.

 

EESHA MUNEEB is senior specialist, oil-price assessments, at S&P Global Platts.

 

Source: http://www.nationmultimedia.com/news/business/EconomyAndTourism/30311645

 

 

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