Energy Prospectus

Normally, March - May is the low point of the year for crude oil demand. Demand for heating oil is on the decline and it is still a few months before the demand for gasoline moves higher when the kids get out of school. However, the Chinese are soaking up all the extra oil they can, probably because they see the supply risk of conflict with Iran. Article below from Reuters. - Dan
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With OPEC pumping oil at record levels, the market appears to be awash with crude — at least on paper — but it is doing very little to cool down prices that are edging closer to their all-time high of $147 per barrel.

Why?

JP Morgan analyst blames lack of data from emerging markets for the disconnect.

“Unfortunately, market participants tend to fixate on areas where there is good transparency and regular data flows, such as the U.S. and the OECD,” says Lawrence Eagles, a JP Morgan analyst, in a note to clients. “In reality, these areas are in a mature and contracting demand phase — the major changes in demand in the past 10 years have all taken place in the more opaque emerging markets.”

The biggest culprit may well be China as it builds its strategic petroleum reserve (SPR).

Since late last year, China has begun to use two bases of the second phase of the strategic reserve in the country’s northwest – Dushanzi in Xinjiang region and Lanzhou in Gansu province.

.An estimated 17 million barrels of crude oil, or around 190,000 barrels a day, have flowed into both commercial and strategic tanks in Dushanzi and Lanzhou, industry sources told Reuters.

The International Energy Agency said in its February report up to 79 million barrels of new storage could be available in 2012 in China, which would imply an extra 220,000 bpd of crude demand, should China decide to fill the reserve steadily during the year.

Showing no signs of slowing down, on Friday the world’s second largest consumer announced it was building a storage facility in northeastern Jinzhou city — one of eight bases comprising the second phase of the SPR.

According to JP Morgan’s calculation, the oil markets may be as tight as the oil market peak in 2008.

That could be further exacerbated as China could soak up 350,000 bpd for the rest of the year.

“Supplies look as if they will get modestly easier over March, April and May, but not significantly if China looks to fill its SPR. And if that is the case, there is unlikely to be much respite in the oil price without OPEC pumping more oil.”

from Reuters

.Posted in: Energy, Energy News & Analysis, Marketscope .

Saudi: Oil exports to U.S. jump
Is it a response to sanctions on Iran or just business?

By MATTHEW ROBINSON AND JONATHAN SAU, Postmedia News March 18, 2012 Comment 0 •Story•Photos ( 1 )
Saudi Arabia has booked very large crude carriers, like this one, to carry more oil to the United States.Photograph by: U.S. Navy , Getty ImagesNEW YORK — Saudi Arabia is preparing to extend this year’s unexpected jump in oil sales to the United States, adding to speculation about the response of the world’s top oil exporter to sanctions against Iran and a rally in prices.

The kingdom’s shipments to the United States have quietly risen 25 per cent to the highest level since mid-2008, according to preliminary U.S. government data, a sizable leap that appears at least partly related to the imminent completion of a major expansion at its joint-venture Motiva refinery in Texas.

But some say the scale of the increase, plus other U.S. data showing Gulf Coast inventories are still subdued, suggest the potential for a political dimension as well, evoking comparisons to 2008 when the OPEC kingpin was driving up production to knock oil prices off record highs near $150 a barrel.

The surge appears set to continue. Vela, Saudi Arabia’s state oil tanker company, has booked at least nine very large crude carriers (VLCCs) capable of carrying 2 million barrels of crude each from the Middle East Gulf to the U.S. Gulf since the start of March, the biggest such wave of fixtures in years, analysts say.

The pivot to the U.S. market, which bore the brunt of Saudi output curbs after 2008, is a surprise for two reasons.

For one, many analysts had believed that the kingdom’s modest output increase in recent months was bound for fast-growing Asian markets, particularly given the pressure on refiners there to reduce their imports from Iran.

Plus, it comes after a year in which U.S. crude oil imports shrank to their lowest since 1999 thanks to a dramatic boom in shale oil production and tepid demand from consumers who are making every effort to cut back as gasoline prices rise.

The White House has been scrambling for options to bring down gasoline prices — at a seasonal record high — during an election year, after concerns over an Iranian supply disruption launched benchmark Brent crude to over $120 a barrel not seen since the record price run of 2008.

Washington has urged ally Saudi Arabia to cover potential shortages when new U.S. and European Union sanctions are expected to reduce Iranian oil exports from July. The Obama administration has considered releasing strategic oil inventories, potentially as part of a bilateral deal with Britain.

The kingdom has stepped up efforts this week to assure edgy markets that it will make up for any oil supply disruptions at a time when Iran’s standoff with the West has begun to intensify.

“Beyond the expansion at Motiva, there has been a major public shift by the Saudis since the Iran tensions started to raise the price of oil,” said Amy Jaffe, an energy policy expert at Rice University’s Baker Institute in Houston.

“Saudi Arabia and the United States are trying to show the Iranians they (the Iranians) will have little flexibility, and they shouldn’t count on the world needing all the oil that Iran produces.”

Saudi output in February was up 450,000 barrels per day (bpd) from October at its highest since August. PRODN-SA

The build appears related, at least in part, to a massive expansion project at Saudi Arabia’s 285,000-bpd Motiva Port Arthur, Texas joint-venture refinery with Shell Oil, the U.S. unit of Royal Dutch Shell.

All expansion units are expected to be in production by the end of the second quarter of this year, with the expanded refinery reaching, by the end of the year, a maximum capacity of 660,000 bpd. Motiva Enterprises began circulating feedstocks through some of the expansion units in January

Motiva declined to comment. The expansion project, budgeted at $5 billion, began in 2007, and when complete will make the refinery the largest in the United States.

“I suspect there is some seasonality to it, U.S. refiners build inventories in the first quarter and U.S. refiners start up Gulf Coast plants out of maintenance,” said Jan Stuart, head of energy research at Credit Suisse in New York City.

“In addition, this year you have the Motiva expansion, which will buy a lot of crude,” he said, adding the building up of 20 days worth of inventory could account for part of the increased Saudi shipments.

That would be equivalent to building up inventories of 7.5 million barrels, by a Reuters calculation, implying a need to build 100,000 bpd of stock over the first 10 weeks of the year.

Still, crude inventories in the Gulf Coast region have not grown as much as they traditionally do during the first quarter when refiners build up stocks.

Gulf Coast stocks have risen by only 10.3 million barrels — or roughly 140,000 bpd — over the 10 week period, compared with 14.2 million barrels on average for the past five years, according to EIA data. The weekly data are preliminary, and more comprehensive monthly data for January is not yet available.

While the rise in Saudi output has been well charted, the fact that the lion’s share of it appears destined for U.S. refiners will come as a surprise to many. Overall U.S. demand for foreign crude has ebbed this year as a boom in domestic and Canadian production reduces the need for imports.

The reversal of the key Seaway pipeline — which will begin running from Oklahoma to Texas by July — was expected further to temper demand for imports by helping bring more cheap crude from the Midwest to the U.S. Gulf Coast refining hub.

“We were all expecting to see U.S. imports fall for Vela, so it’s a jump at a time when we are preparing for a reversal given the Seaway pipeline,” one shipping source said. “It raises the question why would they need more imports?”

Omar Nokta, managing director with investment bank Dahlman Rose & Co, said in a note on Friday that it was the first time in “several years” for Vela to book so many tankers in such a short time.

Provisional weekly data from the U.S. Energy Information Administration shows that the rise in supplies began several months ago, and outpaced gains to other consumers such as China.

U.S. imports of Saudi oil hit 1.5 million bpd in the first 10 weeks of 2012, up 300,000 bpd from the fourth quarter of 2011 and marking the largest rise in shipments since the second quarter of 2003. Saudi shipments to China in January rose only 14 per cent from the year before.

Total U.S. crude imports are up only 165,000 bpd in the first 10 weeks of the year versus the fourth quarter. The EIA was not immediately able to respond to requests for an explanation of the data.

The shift also could simply be the result of restoring supplies to U.S. customers whose shipments had been cut much more deeply after prices crashed four years ago.

“Up to 2008, there was definitely a much larger rise in shipments to Asia, that’s where the demand was growing. The cuts that followed that were not proportionate,” said a senior executive at a major Saudi oil customer.

“Now there’s a degree of rebalancing.” The rise in bookings to the U.S. Gulf has also tightened tanker availabilities, helping push the average earnings for VLCCs on the benchmark Middle Gulf to Japan route — the major market barometer — to their highest level in over a year to $33,205 a day, Baltic Exchange data showed.

Data shows that the Saudi crude has been priced advantageously for U.S. buyers. Official selling prices (OSPs) for U.S. buyers, which are set by the state oil firm Saudi Aramco, have fallen to a deep discount versus Asian and European refiners, according to Reuters data.

The bargain rates may have encouraged a bit more crude to move West, although industry sources say the kingdom’s largest customers with global refining systems have less flexibility to shift supplies between different regions than they have in the past.

Edward Morse, global head of commodities research at Citigroup, said that while the higher U.S. volumes could be due to Motiva, it may come as part of efforts to build up global inventories.

“I think that if you look over a longer term, the Saudis are increasing their exports to the whole world right now and not just the U.S.,” Morse said.

“The Saudis are getting oil onto the market to encourage inventory building, and to show their customers they can deliver whatever is needed.”


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