For a number of reasons, all eyes will be on Mariner East 2, which will increase the U.S.’s ability to export ethane and LPG to Europe, as it stumbles toward completion. For U.S.-Europe NGL trade, it comes as Europe’s steam crackers are consuming growing volumes of ethane and LPG. However, the development of Europe’s ethane imports continues to fall short of expectations. Despite the Mariner East expansion, it will be surprising if ethane shipments via Mariner East rise to much more than 80,000 b/d six to 12 months from now. On the other hand, the expanded terminal’s LPG capacity will re-route existing LPG exports and be fully utilized. The most critical and far-reaching market development associated with Mariner East 2, however, is the timing and ramp-up of increased LPG exports. As the Global LPG Balance Chapter describes, demand growth outside North America will hit a wall when a lack of new U.S. terminal capacity chokes foreign access to North America’s growing LPG supply.
Refined products consumption will return to growth of 180,000 b/d in the next year after shrinking by 40,000 b/d over the past 12 months. Gasoline demand will lead the way with growth of nearly 50,000 b/d, due partly to reconstruction activity in Iraq spurring oil demand. Gasoline imports will still decline regionally, however, with new refining capacity coming online in Saudi Arabia and Iran.
OPEC will start to raise crude oil output this summer, with Saudi Arabia, Kuwait, and the UAE contributing the majority of new production. The increase will be at least 450,000 b/d but could be substantially larger if OPEC attempts to replace more of Venezuela’s lost volumes. Russia and other non-OPEC parties to the November 2016 production deal will also increase output in the next several months.
OPEC has agreed to rollback overcompliance with the original production deal of November 2016. This appears to mean an increase of 450,000 b/d among the voluntary over-complying countries, with the bulk coming from Saudi Arabia, Kuwait, and the UAE. However, the communique could also be interpreted as enabling an increase of as much as 1 million b/d, with some members replacing lost volumes from involuntary over-complying countries like Venezuela. At this point, the small step interpretation is more likely.
In its May Global Crude Oil Outlook ESAI Energy points out that the growth in medium and heavy refiner demand was already pushing the OPEC+ deal towards an end by 2019. The U.S. request for more crude oil and Saudi Arabia and Russia’s apparent willingness to respond provides additional rationale. How this “end” is finessed remains to be seen, but clearly the medium and heavy producers of OPEC (besides Venezuela and Iran) will increase production in 2019.
Plummeting production in Venezuela, declines in Angola, and lower exports from Iran will encourage Saudi Arabia and other OPEC members to increase crude output later this year, and remain in compliance until they decide to modify or end the OPEC+ deal.
Oil & Gas Journal August 14, 2017
In its recent Five-Year Outlook, ESAI Energy points out that the call on Organization of Petroleum Exporting Countries crude will remain under tremendous pressure over the next 5 years.
Saudi denial of oil tankers entering a Yemeni port brought the Yemeni conflict to the fore in the oil sector. While the oil implications are negligible, the movement of the conflict towards the sea raises the potential for an accidental incident leading to direct conflict between the Saudi coalition and Iran, and the U.S.
This is more than a diplomatic row among GCC members. Perhaps emboldened by President Trump’s visit, Saudi Arabia and its allies have declared if you are with Iran (or specific radical Sunni groups), you are against us. This effort to delineate sides in the region cannot be easily reversed without substantial outside pressure. Expect a geopolitical premium to creep into energy prices as this dispute continues.
OPEC is very much alive, and has just extended its production restraint through the rest of 2017 and the
first quarter of 2018, improving the outlook for 2017 and maybe even 2018.
Notwithstanding the pageantry of the U.S. President visiting Saudi Arabia and the enthusiasm of young Iranians hailing their moderate President’s reelection, little changed in terms of the region’s political stability, the battle with ISIS or oil policy this weekend. The clearest signal from the weekend was the public and forceful assertion that the U.S. has allied itself with the Saudis versus Iran, which can only have stoked the age-old rivalry. This should not impact OPEC dealings this week as Iran’s production is near a top, but it is likely to have repercussions down the road when (and if) Iran’s productive capacity rises.
The decision by Saudi Arabia, Russia and ostensibly the rest of OPEC to extend the production cut through the first quarter of 2018 is not a surprise, except for the addition of the first quarter of 2018. Extending through early 2018 signals that the producers understand the magnitude of the challenge. Whether they rise to the challenge depends on their success this summer. OPEC needs to do as much as possible now to temper the surplus coming in the first quarter.
At the end of 2014, Saudi Arabia, with its OPEC partners, opted to lift crude oil production and
pursue greater market share in the face of rising U.S. shale production and the expected removal of
sanctions on Iran. By the end of 2015, crude oil prices had tumbled under $40, Saudi and Iraqi
production had risen by 1.5 million b/d, a nuclear deal was indeed struck, and Iran was gearing up to
raise exports. U.S. shale producers had worked furiously to cut costs and stay in business, but their
production had finally crested and was declining. Ironically, in this market of low oil prices and
falling U.S. production, the U.S. government lifted the ban on crude oil exports.
The conclusion of the Iran nuclear deal in 2015, by the Obama Administration, was indicative of a subtle
shift in U.S. positioning vis a vis the Saudi-Iranian rivalry for hegemony in the Gulf. In a reversal, President
Trump is shifting the U.S. position back in favor of Saudi Arabia under the guise of fighting ISIS.
Early indications from the Trump Administration hint at efforts to tip the balance back towards the Saudis.