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Several factors suggest the time is ripe for a surge in US crude exports, but volumes have not changed much so far.

Global benchmark Brent crude is trading some $4.50 above US marker West Texas Intermediate (WTI), which is priced in Cushing, Oklahoma, which well exceeds the cost of transport from Cushing to export terminals along the US Gulf Coast. The US downstream is also in heavy maintenance and flows of Russian petroleum to Europe are under threat.

And yet, according to ship brokers and tanker trackers, US crude exports have not jumped.

Cushing Constrained

One major reason is that physical crude flows from Russia seem to be holding up for now.

Market players said the disparity between a wide Brent-WTI spread on the one hand and flat US crude exports on the other reflects a familiar dynamic — namely, that Cushing is constrained and to a large degree divorced from global markets at a physical level.

“Even if demand comes from overseas, the capacity out of Cushing is set [by the Seaway and Marketlink pipelines to the US Gulf Coast],” one Texas-based broker told Oil Daily, adding that he had virtually never seen either pipeline operating at less than the high 90% capacity.

That means that even though a potential disruption to Russian crude flows to Europe has helped widen the Brent-WTI differential, “Cushing can’t be responsive,” the broker said. That in turn widens the spread further.

In addition, several experts noted, inventories at Cushing are close to their minimum operating levels — realistically, very few barrels can leave the hub.

The Houston WTI price assessment is more relevant to export economics, the broker said, echoing statements from several analysts and other market players. Activity in the Houston futures market has picked up recently, but traders say the hub remains geared toward physical oil trade.

“If you look at the prices along the US Gulf Coast, those spreads didn’t widen like Cushing did,” said Andy Lipow of Houston’s Lipow Oil Associates.

Differentials did move, but not at the scale of Cushing WTI’s discount.

Structural Support

The structure of oil’s forward curve plays a role as well. WTI futures are in steep backwardation, with April trading some $2.10 above May and $4.50 above June.

Because Houston is so physical, and because the forward curve is in such steep backwardation, players in that market tend to sell what they have very quickly — they don’t build inventory, as doing so is a money-losing proposition.

“The sellers at Houston have sold their barrels 100%. They haven’t rolled,” the broker said.

In short, the barrels are already spoken for.

Looking Ahead

That’s not to say that US crude exports have no role to play in offsetting potential disruptions to Russian flows. But rather than a dramatic, structural surge, experts say such a development would mark a rearrangement of flows.

“Should the West ban Russian oil sales in Europe, which is highly unlikely, Russia would certainly seek to sell more oil into China by discounting the price,” Lipow said. “That would result in China buying less oil from other suppliers and that oil could be redirected to Europe.”

The same dynamic applies should Russia decide to cut off supplies to Europe.

The Asia-Pacific is the largest foreign regional consumer of US crude exports, and thus US flows there, displaced by cheap Russian barrels, would instead flow to Europe.

In addition, the US is mulling a major release of oil stocks from its strategic petroleum reserve. Market players said they expect the vast majority of any such release to be snatched up by overseas buyers rather than US refiners.

Some market watchers see March as a strong month for US crude exports. Tanker-tracking firm Kpler’s current outlook sees March crude and condensate exports close to February’s levels.

Gas is a cleaner fuel than crude oil.

Saudi Aramco closed a deal to sell a stake in its natural-gas pipelines for $15.5bn and entered into a pact with BlackRock to explore low carbon energy projects.

An investor group, led by BlackRock, acquired a 49 per cent stake in Aramco Gas Pipelines Co. in a lease and leaseback deal in December, according to a statement. The consortium also comprised Keppel Infrastructure Trust, Silk Road Fund, China Merchants Capital, and Saudi Arabia’s state-owned Hassana Investment Co.

BlackRock’s investment comes even as chief executive officer Larry Fink puts pressure on firms to boost environmental, social and governance, or ESG, standards. Gas is a cleaner fuel than crude oil but still contributes to heating the plant.

“Getting to a net zero world will not happen overnight,” Fink said in the statement. “It requires us to shift the energy mix in incremental steps to achieve a green energy future. Bold, forward-thinking incumbents like Aramco have the technical expertise and capital to play a crucial role in this transformation.”

The 20-year arrangement “represents further progress in Aramco’s portfolio optimisation programme and highlights the strong investment opportunities presented by Aramco’s significant infrastructure assets,” according to the statement.

The deal is part of Saudi Arabia’s drive to sell assets and use the money to fund new industries from artificial intelligence to electric vehicles, while also increasing output of both oil and gas. In a similarly-structured transaction in April, Aramco sold a $12.4bn stake related to its oil pipelines to investors including Washington-based EIG.

By Bloomberg, February 27, 2022

New Delhi: To check the volatility and price rise of crude oil, India may release crude oil from its SPR (Strategic Petroleum Reserves). The Russia Ukraine war has disrupted global energy prices. Experts are suggesting that crude oil may hit even $125 per barrel later this year.

All major oil-consuming nations have coordinated to subside the crude price rise. On 23 February, White House press secretary Jen Psaki said that a release of reserves was “certainly an option on the table.” Earlier in November last year. US President Joe Biden has said that the US would release 50 million barrels of oil from the SPR in a bid to lower the fuel prices. The US has mentioned that The SPR release from the US will be executed with close coordination with major energy-consuming nations, including China, India, Japan, South Korea, and the UK.

India is the world’s third-biggest oil importer of crude oil and imports over 80% of its oil needs. At present Indian refiners hold crude oil reserves of 64.5 days. In addition to that, India also holds 39.62 million barrels of crude oil through its Strategic Petroleum Reserve body ISPRL (Indian Strategic Petroleum Reserves Limited). Cumulatively at present India has oil storage for 74 days.

In July last year, the Government approved the establishment of two additional commercial-cum strategic facilities with a total storage capacity of 6.5 MT underground storages at Chandikhol (4 MT) and Padur (2.5 MT) under public private partnership (PPP) mode under phase II of the SPR program. When phase II is completed, it will meet an additional 12 days of India’s crude requirement.

Reuters has reported In Aug, 2021 that India has begun selling oil from its Strategic Petroleum Reserve (SPR) to state-run refiners as it implements a new policy to commercialise its federal storage by leasing out space.

Let’s know more about the Strategic Petroleum Reserves : 

What is Strategic Petroleum Reserve (SPR)

Strategic Petroleum Reserve (SPR) is kept by the government of a particular country or a private industry, to use in case of any crisis or emergency.

India maintains its petroleum reserves through a Government of India Special Purpose Vehicle called Indian Strategic Petroleum Reserves Limited (ISPRL). ISPRL is a wholly-owned subsidiary of the Oil Industry Development Board (OIDB), which functions under the administrative control of the Ministry of Petroleum and Natural Gas.

Benefits of Strategic Petroleum Reserve (SPR)

Petroleum and Natural Gas Shri Dharmendra Pradhan has told parliament that Govt has filled the SPR Strategic Petroleum Reserves to its full capacity during low crude oil prices in April / May 2020, which resulted in national savings for around 5000 cr.

Countries owning biggest Strategic Petroleum Reserves in world  

• US  – 714 million barrels
• China – 4000 Million Barrels  
•  Japan – 314.5 million barrels
• South Korea – 146 million barrels
• Spain – 120 million barrels

Zeenews by Abhishek Sankhyayan, February 27, 2022

The price of global refined products are soaring—even more so than crude oil itself, as demand for those refined products is proving too much for refiners to keep up with, according to a new analysis by Vortexa.

Inventories of refined products are now near historic lows—and given the refining maintenance season that will soon be upon Asia and Europe, it doesn’t look that those historical lows are going to ease substantially.

Most refiners in Asia and Europe enter their refining maintenance season in Q2. But so far, Vortexa says, there is no indication that those refineries have plans to ramp up production ahead of maintenance season to provide a cushion to survive turnaround.

What this means is that today’s tightening may soon grow even tighter.

One might find it surprising that today’s high global refined products prices aren’t enticing refiners to up their runs. But higher costs for refiners as a result of higher natural gas prices, higher crude oil prices, and higher carbon tax costs in Europe are sucking up the extra cracks.

In the United States, gasoline supplies are also low—and falling–in part due to refinery and FCC maintenance in Q1.

Around the world, spare refining capacity is not widely available. According to Vortexa, Japan is one of the few countries with refining capacity to spare, but even Japan has, over the last two months, increased run rates by 40% compared to June 2021. Mexico has some spare capacity as well, but it hasn’t tapped that capacity in years, and China has spare capacity, but China’s spare capacity is tightly controlled by the Chinese government.

It’s likely that only a greater increase in refined products prices could entice China and Mexico to bring some of that capacity back online.

Oilprice by Julianne Geiger, February 21, 2022

The warning signals are starting to flash for the profit margins of oil refiners in Asia with high crude prices threatening demand just as many of the region’s economies start to emerge from the coronavirus pandemic.

The profit from turning a barrel of Dubai crude into products at a Singapore refinery , the regional benchmark, dropped to $6.36 on Feb. 18.

The measure has fallen 24% from the recent peak of $8.37 a barrel on Feb. 14, which was the highest since the $8.44 recorded in late October last year.

The relationship between refinery margins in Singapore and the price of Brent crude futures , the global oil benchmark, isn’t always consistent and depends largely on the factors that drive the price of crude up or down.

Brent ended at $93.54 a barrel on Feb. 18, suffering a loss of nearly 1% from the prior week, the first such weekly decline since mid-December.

However, Brent has rallied 22% this year and is currently near a seven-year high, as the market frets over tensions between major producer Russia and its neighbour Ukraine, as well as the seeming inability of the OPEC+ group to actually increase output by its agreed monthly amounts.

When the crude oil price is gaining on strong demand, refining margins tend to move in the same direction, and conversely when oil falls on weak demand, so do refining profits.

However, when crude increases on the back of supply constraints, such as the current output restrictions put in place by the Organization of the Petroleum Exporting Countries and its allies, including Russia, in the group known as OPEC+, then refinery margins tend to weaken.

The potential issue for Asia’s refiners is that the current bout of crude oil strength is being driven by both demand and supply factors.

Up until now it would seem that the recovery in oil demand in Asia has helped drive margins higher.

Asia’s crude oil imports are estimated at 25.66 million barrels per day (bpd) in February by Refinitiv Oil Research, up from January’s 24.47 million bpd and December’s 23.71 million bpd.

It’s also likely that February’s imports will be the highest on a barrels per day basis since before the coronavirus pandemic started at the beginning of 2020.

DEMAND DESTRUCTION COMING?

However, with crude oil prices reaching close to $100 a barrel, leading to record or near-record high retail fuel prices in many Asia countries, including India, Japan and Australia, the risk of demand destruction is growing.

It’s also worth noting that physical crude oil is generally bought at least six to eight weeks ahead of delivery, meaning cargoes arriving in Asia now were arranged when crude was substantially cheaper than the current price.

This means the expensive crude being bought currently will only arrive at Asia’s refiners in late March or April.

It would seem that the high crude price is switching from being driven by a recovery in demand to being spurred by lack of sufficient supplies from major exporters.

In the fourth quarter of 2019 Brent crude futures rallied strongly as the market expected, and then got, a deep output cut from OPEC+. However, Asia’s refining margins collapsed at the same time, with the Singapore benchmark falling to a loss of $1.29 a barrel by Dec. 19, 2019.

If there are signs that demand growth in Asia is faltering amid high retail prices in coming months, and crude prices are still elevated on supply constraints, refining margins are likely to come under further pressure.

Reuters by Sam Holmes, February 21, 2022

Amid an increase in global demand and concerns over key supplies, global oil prices are approaching $100 per barrel for the first time since 2014. But, with prices rising, what does this mean for the renewable energy transition, especially in Gulf countries?

After opening the year at around $78 per barrel, Brent crude prices rose sharply over the first six weeks of 2022 to surpass $94 as of February 14, the highest price in more than seven years.

Driven primarily by a lack of supply and a recent post-lockdown spike in global demand, the increase caps off a dramatic recovery of prices, which had fallen to less than $20 a barrel in April 2020.

Given the low oil price environment of the last couple of years, the recent increase has prompted discussion about the implications for investment in renewable energy, particularly for oil-exporting countries in the Gulf.

Although investment in oil and gas has fallen by about 30% since the outbreak of the pandemic, there are signs that the increased demand and rise in prices could lead to a reversal of that trend.

Carbon Tracker, a London-based climate change-focused think tank, noted last month that higher oil prices might encourage energy companies to invest in new exploration and production projects.

Indeed, on February 1 energy giant ExxonMobil announced a 45% increase in its budget for drilling and other activities this year, while a day later members of the Organisation of the Petroleum Exporting Countries and other leading oil-producing nations – an alliance known as OPEC+ – agreed to stick with their pre-planned target of increasing oil production by 400,000 barrels per day.

At the same time, there are concerns that higher oil prices could incentivise the consumption of coal, which reached an all-time high in 2021 and is on track to reach even higher levels this year, according to the International Energy Agency.

In addition to its lower price, coal use is being driven by rising energy demand – led by China and India – and insufficient levels of investment in renewables.

A boon for renewables?

Although high oil prices have the potential to incentivise new investment in oil and gas projects, renewables could ultimately benefit from the current situation.

Rather than directly challenging renewables and slowing the energy transition, many energy industry analysts believe that the current high prices – and the associated financial windfall – could lead governments and oil majors to play the long game and further increase their investments in renewable energy.

For example, in September last year French energy giant Total said it would take advantage of high oil prices to buy back $1.5bn in shares to boost investment in renewable energy, while earlier this month BP – upon announcing its highest annual profit in eight years, at $12.8bn – stated it would increase spending on low-carbon energy to 40% of total spending by 2025 and 50% by 2030.

Gulf pushing ahead with renewables

A prime example of an oil-producing region that has recently reaffirmed its commitment to renewables is the Gulf.

Indeed, many Middle Eastern countries have identified the development of renewable energy as key to their long-term economic diversification plans. 

For example, Saudi Arabia aims to generate 50% of its electricity from renewables by 2030 and has set a net-zero target of 2060.

To help achieve these goals, in December the government announced that it would invest SR380bn ($101.3bn) in renewable energy production by the end of the decade, while in April last year it inaugurated the Sakaka solar power plant, the country’s first utility-scale renewables project.

Meanwhile, in October the UAE pledged to invest Dh600bn ($163.4bn) in renewables by 2050, at which point it hopes to achieve net-zero emissions.

The announcement came just a few weeks after the inauguration of the first stage of the Mohammed bin Rashid Al Maktoum Solar Park in Dubai. The park is expected to have a capacity of 5 GW by 2030.

Elsewhere in the region, in late January Oman inaugurated the 500-MW Ibri 2 solar field, the country’s largest utility-scale renewables project, while Qatar, one of the world’s largest exporters of natural gas, has also increased its focus on renewables.

In October last year Qatar Petroleum, the national energy company, changed its name to Qatar Energy, in order to better reflect the company’s renewables-focused strategy.

Major projects include the 800-MW Al Kharsaah Solar plant, located approximately 80 km west of the capital Doha.

Once fully completed, the project will be the country’s largest renewable energy development. It is set to be inaugurated in the first half of this year.

While there is some scepticism as to exactly how much of the financial windfall associated with high oil prices will go towards the energy transition, and whether net-zero ambitions can be achieved if funds continue to be channelled into new exploration and production projects, it is clear that renewables are playing an increasingly important role in the long-term energy plans of companies and governments alike.

OilPrice by Oxford Business Group, February 21, 2022