OPEC supply cut extension builds Asia’s crude supply concerns

OPEC supply cut to March, 2018

The decision by the Organization of Petroleum Exporting Countries to extend the OPEC supply cut to the end of the first quarter of 2018 did not help boost oil prices, but it did leave some refiners in Asia concerned about their crude supply.

The extension of the pact left the production cuts at 1.8 million barrels per day (b/d, which left financial traders thinking the global glut would stubbornly hang on.

Reuters reports investment bank Jeffries said “The market voted with its feet,” as crude prices fell 5 per cent to near $50/barrel.

However, in the physical markets where it takes weeks or months for tankers to deliver up to $100 million in crude oil, refiners are wondering if they will have to search for new suppliers.

“This is a declaration of a strong will of OPEC as well as non-OPEC producers to tighten overall supply-demand,” Yasushi Kimura, president of the Petroleum Association of Japan, and chairman of petroleum conglomerate JXTG Holdings told Reuters.

He added to ensure crude supplies, his association must “carefully monitor OPEC’s production cut adherence.”

Kimura said the extension of the OPEC supply cuts could mean demand may exceed supply this year.

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Should that happen, refiners would be forced to use up their reserves, which would push up prices until production catches up with consumption.

“In 2017, global demand is likely to exceed supply … and crude prices are likely to … rise toward $60 by the end of the year,” JXTG Holdings’ Kimura said.

Up until now, Asia has not been impacted by the supply cuts as exporters were eager to maintain their market share, opting to cut domestic supplies or shipments to marginal buyers.  As a result, inventories in the major markets have remained bloated, keeping prices low.

“We have (so far) not had any impact in terms of any cut from any of these (OPEC) sources into India,” B. Ashok, chairman of Indian Oil Corp told Reuters in an interview.

According to OPEC sources, that will likely change as kingpin Saudi Arabia is intent on tightening the market.

But, many refiners are not expecting a crude shortage, as they have ample alternative supplies.

“Crudes that can be processed in our refineries include crudes from the US.  We have procured some crude even from Canada. We have been procuring crude from Latin America … Africa, Russia,” Ashok said.

US producers have bumped up their output by 10 per cent since mid-2016 to 9.3 million b/d and are closing in on Saudi Arabia and Russia’s levels.

An average of 374,000 b/d of US crude has been transported to Asia in the first four months of 2017, according to data from Thomson Reuters Research and Forecasts.

In 2016, the US exported just 48,000 b/d to Asia.

KY Lin, spokesman for Formosa Petrochemical Corp told Reuters “The cut in OPEC supplies will be offset by higher U.S. crude production.”

Most analysts, including Goldman Sachs, Jefferies and Barclays, anticipate oil prices will gradually rise toward the beginning of 2018 as the market tightens.

With OPEC and its allies holding back production, the longer the reductions last, the more the cartel risks losing permanent market share.

“In response to … OPEC production cuts, we are working on diversification of crude oil import sources and looking beyond the Middle East,” Kim Wookyung, a spokeswoman at SK Innovation, owner of South Korea’s largest refiner SK Energy told Reuters.