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 While the stand-off between the oil cartel and U.S. producers of
light, sweet shale oil has captured the limelight in recent months,
the clash over heavier grades - playing out in the shadowy, opaque
physical market - may put even more pressure on global prices that
have halved since mid-2014.
Two factors will come into play over the next few weeks: From the
North, new oil pipelines will pump record volumes of Canadian crude
to the southern refineries, many better equipped to process heavy
crudes than lighter shale oil.
From the Middle East, top exporter Saudi Arabia is offering crude at
discounted prices in an attempt to defend its remaining share of the
important regional market, which has shrunk by more than half in
recent months.
"So far, the Gulf Coast has suffered from an oversupply of light
oil, but now there's competition for heavier crude," said Sandy
Fielden at RBN Energy. With the Saudis already facing fierce
competition for their light grades, the arrival of Canadian crude
"could add insult to injury", he said.
On Monday, Saudi Aramco stepped up its counteroffensive, cutting its
monthly U.S.-bound price for Arab Medium for a sixth straight month,
putting it at the deepest discount against the regional sour crude
benchmark since December 2013. [OSP/SA].
The timing of this clash may magnify its market impact as
Houston-area oil refiners shut down for maintenance in early spring,
further reducing their demand by an estimated 1 million barrels a
day (bpd).
"We'll see that overhang into the summer, at least," said one
physical crude trader.
That will put further pressure on U.S. prices and may spur investors
in New York and London to extend a sell off in crude futures.
SPOILT FOR CHOICE
The looming clash of barrels comes at a time when oil markets
already face a global glut expected to last for a year or longer.
Large volumes of foreign heavy oil reaching the Gulf Coast will give
many U.S. refiners more choice after they have upgraded their
systems to process cheaper, heavier crudes. The new supply also
marks a breakthrough in Canada's years-long effort to bring its
growing Alberta oil sands crude output to new markets.
Enbridge Inc's 600,000 bpd Flanagan South pipeline, which runs from
Illinois down to the Cushing, Oklahoma, oil hub began commercial
service on Dec. 1; Enterprise Product Partner announced that its
450,000 bpd Seaway Twin pipeline from Oklahoma to Freeport, Texas,
shipped its first volumes on Dec. 21.
That promises another quantum leap for Canadian crude after its U.S.
Gulf Coast sales already hit a record 274,000 bpd in October, nearly
three times as much as a year earlier, according to U.S. data.
The new flows will compete with other crudes as well. Some refiners
see Saudi's medium crude as a more direct substitute for Mexican and
Venezuelan crudes.
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However, some refiners are likely to blend oil sands crude with
overabundant super-light U.S. condensate, creating medium blends
that may rival Saudi Arabia's main grade, said Citi global
commodities strategist Ed Morse. He warns the clash could set up
another tumble in global prices.
The growing pressure on the Gulf market is already showing up in
pricing and inventories.
Mars Sour, a domestic grade similar to Arab Medium, has fallen to a
discount of $1.90 a barrel compared with U.S. crude futures after
trading at a premium over 45 cents two months ago.
Crude oil inventories in the U.S. Gulf have risen to nearly 200
million barrels, a record high for late December and up some 15
percent from a year earlier.
The build-up comes as Saudi Arabia shifts its focus to fiercely
defend what remains of its market in the United States - the world's
largest consumer of oil.
Until recently, it seemed to be holding its own in part thanks to a
major expansion of its joint-venture Motiva Enterprises refinery.
Saudi crude sales to the U.S. Gulf rose by a third to a record high
of nearly 1 million bpd in the two years to 2012, a period where
gushing shale production had begun to displace foreign suppliers.
But this year it has begun to lose ground, with shipments tumbling
to 461,000 bpd in October, data from the U.S. Energy Information
Administration showed.
Ironically enough, the decline was driven partly by a one-third cut
in imports by Motiva, jointly owned by Saudi Aramco and Royal Dutch
Shell.
Other customers have also turned away. Valero Energy Corp's cut
imports by 85 percent in the first 10 months of 2014, with Saudi
purchases falling to just 35,000 bpd, according to EIA data.
Marathon Petroleum Co cut Gulf Coast imports to 33,000 bpd in
October from 205,000 bpd 10 months earlier.
While most Saudi customers agree on annual contracts with little
room to reduce purchases, the Kingdom's state oil firm knows it
needs attractive prices to retain long-term buyers.
"As refiners look at Canadian crude availability long term, they'll
be thinking about ways to give themselves more options" said Richard
Mallinson, an analyst at Energy Aspects in London.
(Reporting By Catherine Ngai; editing by Jonathan Leff and Tomasz
Janowski)
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