One major reason for the continued slide in oil prices is the high level of output coming from OPEC producers. The cartel’s decision last November not to throttle back production to shore up prices has added to the growing oil market glut. And it could worsen from a producer’s perspective with Iraq still increasing output and Iran’s export volumes on the rise. This outlook is particularly difficult for OPEC as the cartel is continuing to lose relevance in the U.S., forcing members to compete fiercely for market share in Asia.
OPEC’s output average of 31.5 mbd for July marked the highest production levels in three years, despite a pullback in Saudi Arabia, ongoing struggles in Libya, and Venezuela and Nigeria nowhere near their potential.
Despite remarkably high output in the weak price environment, less and less of OPEC’s oil is heading to the U.S.
Despite the remarkably high output in the weak price environment, less and less of OPEC’s oil is heading to the U.S., which imported as much as 5.4 million barrels per day (mbd) of the group’s supply in 2008, and an average of 4.6 mbd at the beginning of this decade. By contrast, for the first half of 2015, U.S. buyers pulled in just 2.6 mbd from OPEC—roughly a third of total U.S. crude oil imports, versus about 55 percent seen at times last decade.
There are two main reasons for the acute drop in OPEC imports. One is flattened demand—but the main factor is the massive rise in U.S. crude oil production from the country’s shale boom. The 4.5 mbd in U.S. output growth since 2008 has dramatically impacted OPEC suppliers, with Nigeria and Angola seeing their exports to the world’s largest consumer drop to virtually zero.
Competition for Asia
The West African OPEC volumes have been backed out of the U.S. as their crude grades are similar in quality to the light, sweet shale being produced in the Bakken that is railed to East Coast refineries. Losing customers in the U.S. has undermined both Nigeria and Angola’s export revenues, but they have at least been able to make gains the European market, which has been affected by outages in Libya and sanctions against Iran. They have also been able to divert barrels that would have gone to the U.S. to Asia.
Market dynamics, however, are going to adjust even more next year when Iran tries to reestablish itself in Europe and attempt to sell more volumes to customers in China, India, and Japan.
“OPEC members are likely to become increasingly more competitive with each other,” said Matt Smith with ClipperData, which tracks global tanker movements. “The competitive nature of the oil market in Asia means that Iran will likely have to discount its oil to claw back its market share. Others are likely going to get squeezed out of China.”
Besides Iran, there’s also the need for Iraq to find outlets for its increasing volumes. Iraq is currently the third top supplier to China, right behind Saudi Arabia and Russia.
A big key for OPEC is what happens with demand in China, which recently overtook the United States as the world’s largest crude oil importer (although the United States is still by far the largest consumer) and imports roughly one mbd more crude than the U.S. from the cartel. But the outlook for growth may not be as strong as originally expected. China’s economy for the first half of this year was strong, with a soaring stock market, higher vehicle sales, and robust crude oil demand. In fact, Chinese crude imports soared to 7.2 mbd in July, up by a massive 1.5 mbd annually, partly as a result of increased demand for both strategic and commercial stockpiling. However, now the stock market has retreated, and the devaluing of the yuan—a move to stimulate the economy—could slow growth in crude imports by making them more expensive.
Chinese OPEC Imports (Top 4 Suppliers)
OPEC export rebound to the U.S.? Not likely.
With the U.S. slicing OPEC imports and Asian demand growth likely stalling because of China’s economic woes, who will mop up the excess supply? European demand is stagnant and well supplied by the North Sea and Russia. The U.S. could see a rebound in its thirst for crude imports—which are around 7.2 mbd—now that domestic oil production is stagnating, and may in fact decline considerably if some forecasts are realized. Meanwhile, U.S. fuel demand is robust—gasoline demand is near record highs as drivers take advantage of low prices at the pump and the U.S. economy is humming along. But any increases would not likely help OPEC producers.
“Any shortfall from higher U.S. demand or slower shale production is just as likely to be met by Canadian or Latin American producers as it is from OPEC members in the Middle East,” said Smith.
“Any shortfall from higher U.S. demand or slower shale production is just as likely to be met by Canadian or Latin American producers as it is from OPEC members in the Middle East.”
But while U.S. imports of OPEC crude are unlikely to increase, the current volumes supplied by the cartel are poised to remain stable. Saudi Arabia and Venezuela are the main OPEC suppliers to the U.S., sending roughly 1.1 mbd and .8 mbd, respectively, or about 75 percent of the group’s total. Iraq, Kuwait and Ecuador are the only others sending substantial volumes, but all three ship under .3 mbd to the U.S.
Although imports from Saudi Arabia and Venezuela have declined from their peaks, they are still elevated and should remain so. For one, both producers have strong customer bases in the U.S., and have established footholds thanks mainly to their joint ventures. Petróleos de Venezuela owns US-based refiner Citgo, which holds some .76 mbd of downstream capacity. Saudi Aramco, meanwhile, is a 50-50 partner with Shell in Motiva Enterprises, a joint venture that owns three refineries on the Gulf Coast.
Secondly, as big producers of heavy crude, Venezuela and Saudi Arabia can market their volumes to U.S. Gulf Coast refiners that are geared toward processing those types of grades. The ability to run heavier crudes has given them both countries distinct advantages over their West African counterparts.
OPEC’s relevance to the U.S. market has certainly dwindled, but the cartel still supplies a third of the world’s oil, and crude output in member countries is the least costly to produce.
OPEC’s relevance to the U.S. market has certainly dwindled, but the cartel still supplies a third of the world’s oil, and crude output in member countries is the least costly to produce. Against this backdrop, OPEC’s preeminence in the global oil market will remain intact.