RIYADH: With US crude imports and consumption on a downward slope and the Chinese imports attaining new heights, global energy markets are undergoing a major metamorphosis — looking more and more towards Beijing and not Washington to take a cue.
The US consumption patterns today are being impacted by a number of factors.
With ‘efficiency’ the new mantra and almost 70 per cent of crude being consumed by the transportation sector, the US government’s mandate to boost new cars mileage by 50pc over ten years is going to impact the US consumption trends significantly.
And then there is the energy intensity. The amount of energy being used to generate $1.00 of the GDP is also undergoing a major transformation.
In the US, today it only takes $0.07 of energy to create $1.00 of GDP as opposed to $0.14 thirty years ago.
In the meantime, the US domestic output too continues to surge rather dramatically. Crude oil rig count in the US has surged from roughly less than 200 in 2009 to 1400 plus in 2013 — indicating the ongoing transformation in domestic output.
Refineries in the United States are thus turning more to lower-priced domestic oil. Foreign suppliers are left with dwindling slices of the domestic US market.
In June, imports from Saudi Arabia accounted for the smallest share of crude processed at US refineries since February 2010, Bloomberg reported.
Saudi exports to the US, which averaged 1.32 million bpd in 2013, reached 1.58 m in April, before dropping by almost half to average 878,000 over the first four weeks of August, US Customs data compiled by Bloomberg reported.
Before reaching a conclusion however, one should also keep in mind the surge in domestic Saudi demand during the hot summer months.
The focus on the Chinese market is thus growing. China now buys more crude from the Middle East than the US. Roughly half of China’s imported oil now is coming from the Gulf. China currently imports around 5.6m bpd, with about half of those coming from the Middle East.
Saudi Arabia today is the top exporter to China, shipping 366,825 bpd (19.8pc of total Chinese imports) in 2012, a paper by Brookings Institution said.
And with the changing environment, Chinese influence on global crude markets too is getting apparent. As the Chinese dragon begins to slow down, markets could be in for some fall — analysts now are feeling.
Demand for oil in China actually fell to 9.61m bpd in July — down 2.1pc from a year ago, and a whopping 6.2pc from June, Platts reported. In the meantime, China’s official
Purchasing Managers Index too fell to 51.1 in August from 51.7 in July. And in case real estate bubble too bursts in China, as is being projected all around, further cooling of the Chinese economic engine could not be ruled out.
Meanwhile, Abheek Bhattacharya writing for WSJ though concedes that China’s effort to build a Strategic Petroleum Reserve (SPR) has given oil bulls comfort that the underpinnings for global oil prices would stay strong, yet he also asserts that in the near term, there are reasons to believe that this mysterious hoard won’t offer much support (to oil markets).
Quoting Amrita Sen of the London-based Energy Aspects, he reports that China might not build the required SPR space fast enough to store the oil just yet — indicating some slow down in its crude intake. ‘Although a few new storage facilities are coming on line this year, more will have to wait till next year, and another chunk will be available only at the decade’s end.’
In another indication of the cooling down of the Chinese economy, a Citigroup report also confirms that Chinese refiners may slash the new refining capacity they had planned for next year.
All these carry immense implications for the global crude markets too. Softening of markets seems a reality — in not too distant a future.
Published in Dawn, September 7th, 2014