The Fuse

OPEC Market Share Battle Moves Downstream

by Matt Piotrowski | March 21, 2017

OPEC countries are shifting their fight for market share downstream. A handful of cartel members are building the foundation to export large volumes of refined products onto the global market in an effort to make up for lost revenues from crude supply cutbacks and consistently low prices. To be sure, major oil producers had planned export refineries before the price crash, but current market conditions have pushed some members to make themselves even bigger players in the increasingly competitive international refined products market.

A handful of cartel members are building the foundation to export large volumes of refined products onto the global market in an effort to make up for lost revenues.

As of late, Saudi Arabia and the UAE have increased their sales of product exports while throttling back crude output, with sales rising by a massive 25 percent last month (see below), in an effort to increase revenue while trying to tighten crude fundamentals.

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Not all OPEC producers are as flexible as Saudi Arabia and the UAE in the downstream sector.

Not all OPEC producers, however, are as flexible as Saudi Arabia and the UAE. For instance, Nigeria has to import refined products, forcing the country to build a massive 500,000 b/d plant to meet domestic demand, since much of its capacity is offline. The country consumes just above 400,000 b/d, so it should, all things considered, have excess product to export after the new plant is operating—particularly if its underutilized capacity resumes full operations. Iran’s main goal in its downstream expansions, too, is its own market, but increased capacity will provide optionality regarding exports. Iraq’s main refinery, the Baiji plant, is out of commission after being attacked by ISIS almost three years ago, while its Karbala project has reportedly been halted for the time being. Algeria, meanwhile, is looking to replace crude exports with refined product exports, but it needs to first expand its refining capacity. But even producers short on refining capacity still take advantage of arbitrage opportunities to sell into the global market. For example, last year, the U.S. imported some 200,000 b/d of refined product from OPEC producers, with an overwhelming majority coming from Nigeria, Venezuela, and Algeria.

Cutting crude but increasing products

With the strategy of cutting crude while increasing product exports, producers can remain committed to supporting global oil prices by restraining exports in that market and adhering to output targets, but still take advantage of their plentiful supply by turning it into gasoline, diesel, or fuel oil. Sales of refined products in the international market are not subject to quotas.

“Increasing refinery utilization is one way to try to sidestep the impact of a production cut.”

“Increasing refinery utilization is one way to try to sidestep the impact of a production cut,” Matt Smith of ClipperData told The Fuse. “It’s a short-term game plan to eke out more revenues, but the Saudis have held a longer-term approach to expand its refinery footprint.”

Oil producers can manipulate the quota system by limiting exports but running more in domestic refineries for only so long, given that output numbers—even though they aren’t always transparent—are published every month by a number of sources. Nonetheless, reducing crude exports can help toward OPEC’s goal of tightening global oil market fundamentals. There’s also the ability to game the system by drawing crude from storage to run in domestic refineries as an effort to comply with production cuts but still keep supply levels elevated.

In the next five years, some 2.8 million barrels per day of new refining capacity will come online in the Middle East.

In the next five years, some 2.8 million barrels per day of new refining capacity will come online in the Middle East, according to the IEA, increasing the market share battle. Though the increase will be offset by 900,000 b/d of closures during that time, the net additions will meet rising demand in each country, while the balance will be used to export products to markets with growing appetites for fuel, chiefly the Asia-Pacific region, or to Europe, where downstream capacity has been shut because of economics. Notable projects include Kuwait’s 615,000 b/d Al-Zour plant and Aramco’s 400,000 b/d Jazan (which comes on top of two giant plants earlier this decade). Iran is also expecting a major plant to come online, while two countries in the region outside of OPEC—Bahrain and Oman—are also investing heavily in refinery projects.

This growth comes on top of the region’s current large surplus of refining capacity. Thus, in five years, according to IEA forecasts, the Middle East will have a 1.3 mbd surplus in gasoline & naphtha (see graphic from IEA below), along with a similar excess of diesel and kerosene.

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Saudi Arabia is trying to stay in the lead in the downstream market share fight. While the Kingdom is pouring investments into a big project inside the country, it is also looking beyond its borders. During King Salman’s recent trip to Asia, Amin Nasser, Chief Executive Officer of Aramco explicitly told Reuters, “Our strategy is about growth in the downstream.” The Saudis want a market for its crude that’s not tied to dynamics of the oil market or OPEC, while also building a customer base in the refined products trade.

A glut of refined products?

A glut of refined products would bring another set of headaches since the cartel makes efforts to manipulate supply and prices for crude, not gasoline or diesel.

Throughout this decade, there has been an explosion in refined product trade around the world. In the past, refineries used to supply their products to customers near their plants, but now arbitrage opportunities have opened up across the global market. U.S. refiners have been the best situated to take advantage of this shift, sending products to consumers in Europe, Latin America, and Asia. Now OPEC and other Middle Eastern producers have gotten in on this, helping them diversify away from solely relying on selling crude, sending extra refined product volumes to markets in both the East and West, a trend to continue throughout the rest of this decade and beyond. The inherent risk of the downstream growth, of course, is that the gigantic surplus of crude shifts to a global market flooded with products, undermining profit margins in all regions. This situation would bring another set of headaches since the cartel makes efforts to manipulate supply and prices for crude, not gasoline or diesel. The product markets may ultimately be harder to rebalance, as plants would have to slash utilization on their own and store excess fuel supply at a loss, making it more difficult to pay back costly up-front investments.

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