The rise in medium and heavy refiner demand was already pushing the production-cut agreement among members of the Organization of Petroleum Exporting Countries as well as some non-members towards an end by 2019, ESAI Energy points out in its May Global Crude Oil Outlook. The US request for more crude oil and apparent willingness of Saudi Arabia and Russia to respond provides additional rationale.
ESAI Energy’s Managing Principal Sarah Emerson said, “This refining investment is coming to fruition at the same time as the fastest global expansion of light, sweet crude supply in the history of the oil market, driven by the Permian shale basin.”
In 2018 and 2019, crude refiner demand will rise by a combined 2.6 million b/d. To export the volumes that will become available, shale producers would have to capture about half of that growth. Yet more than half of the increase in crude demand will be associated with the new refining capacity looking for heavier crude blends.
US shale will need to increasingly compete for existing demand for light, sweet crude. This does not bode well for African exporters. Producers also are likely to stash some crude in tanks that are relatively empty today. Both developments will contribute to weaker crude oil prices, even if OPEC does not raise output.
“This is not a repeat of 2014 and 2015 because inventories are low and OPEC output is constrained by Venezuela, but demand for crude oil by quality will temper the upside for shale exports,” Emerson stated.
How the “end” of the deal is finessed remains to be seen, but clearly the medium and heavy producers of OPEC (besides Venezuela and Iran) will increase production in 2019.
