Shifting Crude Flows And Rising Competition In Asia: Implications For Gulf Producers

Abstract

The Middle East is the world's largest crude exporter with the majority of its crude - sold via long term contracts - flowing eastward. Despite this, significant shifts in global crude flows are expected over the next decade. On the supply-side, the rise of US crude production and exports have played a major role impacting flows and regional balances. US crude production averaged 11.7m b/d in July 2019 - a doubling of production from 2010 levels. Since the lifting of the US export ban in 2015, exports have increased, reaching an average level of 2m b/d in 2018 (a doubling of 2017 levels). Several knock-on effects have resulted: first, US refiners have reduced imports of light-yield crudes from North Sea and West Africa. As a result, these barrels - mainly traded on a spot basis - have been diverted to Asia, earning their status as key swing barrels for Asian refiners. Despite the ongoing US-China trade war, US crude is becoming a more regular staple of Asian refinery diets. US flows to South Korea have begun to displace competing CPC blend as WTI-Brent spreads have allowed for arbitrage opportunities. The growing role of US exports to both Asia and Europe is also taking place at the same time that pipeline deliveries from Russia (via ESPO) increase to China. Similarly, US sanctions against Iran and Venezuela have had the effect of re-directing greater volumes to China as USGC refiners cut Venezuelan purchases and Iranian flows previously destined for Europe are re-directed to Asia. Gulf producers have responded in turn. Saudi Aramco has expanded its marketing and trading activities in Asia through downstream ventures and targeting China's teapot refiners; Iran is building and expanding ties with China; Iraqs State Oil Marketing Company (SOMO) has clamped down on resales of its crude in a bid to gain greater control over the secondary market of its Basrah crude grades; and Kuwait and Iran have offered Asian customers preferential credit terms. These are just some examples of how Gulf producers are shifting their overseas marketing and trading operations to adjust to the new realities of global crude flows. Against the background of this rising competition for market share in Asia, this paper aims to examine future trends in crude oil flows and their strategic implications for Gulf producers.