Published: Sep 07, 2014
Source: Saudi Gazette

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Price correction seen as China, US data signal

Energy Outlook

The US and China, world’s largest energy consumers, are impacting the energy markets - in rather contrasting ways.  While the US crude imports and consumption are on a downward slope, Chinese imports are attaining new heights. And this emerging, new trend is carrying significant bearings on global energy markets. A major transformation is on the way!

The US consumption patterns today are being shaped under the influence of a number of factors. The growing emphasis on efficiency is impacting - rather significantly. With almost 70 percent of crude being consumed by the transportation sector, the US government mandate to boost new cars mileage by 50 percent over ten years too, is contributing to the changing consumption trends in the world’s largest consumer.

And then energy intensity, the amount of energy being used to generate $1.00 of the GDP, is also undergoing a major metamorphosis. Energy intensity in the US in now getting to the point that it only takes $.07 of energy to create $1.00 of GDP - from $0.14 thirty years ago!

And in the meantime, the US domestic output continues to surge - rather dramatically. The crude oil rig count in the US has also in the meantime, surged from roughly less than 200 in 2009 to 1400 plus in 2013 - reflecting the ongoing revolution in the domestic output of the world’s largest consuming nation.

And due to all this and the surging domestic output, refineries in the US too are now turning to lower-priced domestic oil to make fuel, at a record pace. Foreign suppliers including Saudi Arabia, are thus left with dwindling slices of the domestic US market. And Aramco is aware of it. In June, imports from Saudi Arabia accounted for the smallest share of crude processed at US refineries since February 2010, Dan Murtaugh and Lynn Doan reporting for Bloomberg highlighted.

Last December, Saudi Oil Minister Ali Al-Naimi had told reporters in Vienna that he expected Saudi shipments to the US to stabilize at an average of 1.4 million to 1.5 million barrels a day this year. And until recent months, the Kingdom maintained a steady flow to the US of around 1.3 million barrels a day even as total US imports fell by 34 percent from a peak in June 2005. The rapidly changing US market however, is beginning to impact US crude imports from Gulf too.

The Bloomberg report is now asserting that Saudi Arabia and other Gulf producers are losing ground in the US as the shale boom has adversely impacted the demand curve and hence crude imports into the country. Saudi exports to the US which averaged 1.32 million barrels a day in 2013, reached 1.58 million in April, before dropping by almost half to average 878,000 over the first four weeks of August, according to US Customs data compiled by Bloomberg.

US imports from Saudi Arabia fell by 562,000 barrels a day from April to June, more than the 506,000-barrel-a-day decline of total Saudi exports, the US Energy Information Administration and JODI too are conceding.

Although the dip is significant, yet one should also keep in mind the surge in domestic Saudi demand during the hot summer months. The pattern needs to be monitored for some more time, before reaching a conclusion.

And while crude shipments to the US from the energy rich Middle East seems dwindling, the regional focus too is shifting to China and the growing Asia. And there are reasons for this shift in focus. Demand for liquid fuels in Asia is expected to grow 44 percent through 2035, while North American demand shrinks, according to BP Plc.

Last September China surpassed the US as the world’s largest importer of crude oil and refined products. China now buys more crude oil from the Middle East than the US does. And as America’s reliance on Middle Eastern crude is waning, roughly half of China’s imported oil now is coming from the Gulf.

China currently imports around 5.6 million bpd, with about half of those coming from the Middle East. Saudi Arabia, Iran, Oman, and Iraq dominate the list, as do Russia and Angola. With diversification of markets, an absolute necessity for Riyadh, Saudi Arabia today is the top exporter to China, shipping 366,825 bpd (19.8 percent of total Chinese imports) in 2012, a paper by Brookings Institution said. African crude exporter Angola has the second highest share in the Chinese market, exporting 227,395 bpd - some 12.3 percent of the total Chinese imports - during the year. And significantly most of this oil flows through the Strait of Malacca, an strategically vulnerable chokepoint.

All this carries significant impact on the global geopolitics too. But with the US being dethroned from the mantle of the top crude import of the world, one thing is getting certain - the Chinese influence on global crude markets is increasing rapidly. Energy markets are increasingly taking cue from developments in China and not the United States. And this too deserves attention. Markets could be in for some fall - analysts now are feeling, as the Chinese dragon is finally slowing down.    

Platts says, demand for oil in China actually fell to 9.61 million bpd in July - down 2.1 percent from a year ago, and a whopping 6.2 percent from June. Only last week, data confirmed that China’s official Purchasing Managers Index falling to 51.1 in August from 51.7 in July, indicating softening of the country’s economy. And in case real estate bubble too bursts in China, as is being projected all around, further cooling of the Chinese economic engine could not at all be ruled out.

Meanwhile, Abheek Bhattacharya writing for WSJ though concedes that China’s effort to build a Strategic Petroleum Reserve (SPR) has given oil bulls comfort that the underpinnings for global oil prices would stay strong, yet he also asserts that in the near term, there are reasons to believe that this mysterious hoard won’t offer much support (to oil markets).

Quoting Amrita Sen of the London-based Energy Aspects, he reports that China might not build the required SPR space fast enough to store the oil just yet - indicating some slow down in its crude intake. ‘Although a few new storage facilities are coming on line this year, more will have to wait till next year, and another chunk will be available only at the decade’s end.’

In another indication of the cooling down of the Chinese economy, a Citigroup report also confirms that Chinese refiners may slash the new refining capacity they had planned for next year.

Markets are in flux. Some sort of price correction seems due - in not too distant a future! - By Syed Rashid Husain

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