FOR sure, Washington’s twin tussle with China and Iran is not only set to dramatically alter oil trade flows, it also threatens to make a dent in demand in the near to medium term if the tensions escalate.
The oil market is witnessing first signs of falling US crude exports to China ahead of the potential implementation of a 25% import tariff on US supplies, which could come into effect as early as beginning of September.
And even three months after Washington made its intentions clear to re-impose sanctions on Iran, oil buyers are still scouting around for clarity on policies on Tehran, triggering uncertainty about cargo flows and insurance cover.
The diplomatic and trade tensions between some of the world’s biggest oil producers and consumers may leave the market desperately looking for direction.
But one of the biggest factors on the supply side that has raised the downside risk for prices is higher oil production by Saudi Arabia and Russia.
According to a S&P Global Platts survey, Saudi Arabia, OPEC’s largest member, produced 10.63 million b/d in July, the kingdom’s highest since August 2016, when it produced its record 10.66 million b/d.
For now, Saudi Arabia deems that sufficient, as the global supply outlook has improved. It is in no mood to flood the world with oil, ignoring calls from US President Donald Trump who tweeted on July 4 to open the taps to cool the market.
Even Russia’s July crude oil and condensate output rose 1.4% month on month to 11.215 million b/d, in line with Russia’s pledge in late June to boost output under the deal with OPEC and other non-OPEC producers.
Not just in Saudi Arabia and Russia, but signs of improving supplies have been pouring in from other parts of the globe.
Libya’s eastern ports are back in business after a blockade was lifted, allowing its crude production to ramp up by several hundred thousand barrels per day, while Kuwait and the UAE have announced significant planned increases under OPEC’s deal with its allies to ease over compliance with production cuts.
Saudi Arabia’s OPEC governor Adeeb al-Aama has said that the kingdom’s crude exports in July would be about the same as June levels, while exports in August would fall by 100,000 b/d, adding that international oil markets were shaping up as “well-balanced in the third quarter.”
At a time of improving supplies, any potential fallout on demand because of geopolitical tensions may give the market little reason to cheer. Amid strong indications of improving supplies, the front-month ICE Brent futures contract lost nearly $4/b during July. It stood at around $78.40/b at the close of Asian trade on July 2, falling to $74.60/b on July 31.
But despite the silver lining on the supply side, the market is bracing for wild swings in trade flows.
Key buyers of Iranian crude in Europe have started to cease imports of Iranian crude. Refiners have said that August-loading stems were probably the last time they would lift Iranian crude as securing banking, shipping and insurance were already a huge challenge. Even some refiners in Asia are facing similar challenges.
And as Beijing’s tariffs on US crude imports get closer to implementation, China’s crude oil imports from the US for July have fallen sharply from June, and are expected to drop even further for August.
China received 14.65 million barrels of US crude in June, which was a historical high, but volumes more than halved to just 6.9 million barrels in July, S&P Global Platts trade flow software cFlow showed. Arrivals in August are expected to fall even more to around 6 million barrels.
Oil tankers laden with US crude that were initially headed to China appear to be getting diverted to other buyers. And as China’s appetite for US crude wanes, buyers in India and Southeast Asia would find it as an opportunity to bring in more cargoes from the North American supplier.
Concerns on the demand side could get aggravated as China’s crude import growth starts slowing. The first signs of slowing demand was visible in the June data, which showed imports falling about 5% year on year to a six-month low of 8.39 million b/d, marking the first year-on-year drop in 2018.
There are some concerns that the pace of growth in China’s crude imports could slow in H2 as a cocktail of lower runs at independent refiners, potential delays in the start-up of some refineries and higher inventories might curb the appetite for cargoes in Asia’s largest oil consumer.
In addition to concerns about demand and trade flows, oil market participants have raised concerns about shipping in the Red Sea and potential disruptions to supplies.
Saudi Aramco in July had to suspend oil shipments through the Bab al-Mandab strait after its VLCCs were attacked by Yemeni Houthi militants.
Some 4.8 million b/d of oil and products passed through the Red Sea in 2016, according to the US Energy Information Administration. Apart from being a key transit route for oil, the strait is also critical to Saudi Arabia’s own Red Sea refineries, which are largely supplied with crude oil produced in its eastern region shipped from the Persian Gulf.
To sum up, a cocktail of tensions around trade, diplomatic and shipping issues will certainly keep the market on tenterhooks. For the rest of the year, the oil market will be dealing with more questions than answers.
Sambit Mohanty, Senior Editor, Asia Oil News and Analysis, S&P Global Platts
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