Crude trade volumes are revised down but the distances ships must carry it will increase, leading to a more positive view for carriers, reports Splash 247.
Different perspectives
The dynamics of global oil trade flows are complex at the best of times. The situation in Ukraine adds another layer of complexity to a market still recovering from the effects of COVID-19. For the tanker sector, demand can be summed up with two familiar words – tonnes and miles.
What does the Ukraine invasion and subsequent reaction mean for these two factors? From a tonnes perspective, the effects would appear to be negative. We have a high oil price and lower oil demand environment versus our pre-crisis position. OPEC+ policy has (at the time of writing) not changed, other sources of production and potential exports will take time to respond and materialise to the higher oil price environment and stocks are potentially going to be drawn down further.
Whilst we expect China to see positive growth in crude imports this year, risks remain to this and wider Asian demand, which provides the majority of crude import growth in 2022. In March China again imposed strict lockdown measures to contain COVID-19, demonstrating the country’s continued policy of zero-COVID. The ‘endgame’ of this is not clear, particularly given the more contagious Omicron variant. It is likely that China will have to loosen its policy or suffer the continued economic and social costs of lockdowns.
More broadly we can see that 2022 crude trade is revised down significantly from our previous position. Growth is expected to be close to 7% with a reduction of 75 MnT in overall volumes this year, or about 1.5 Mn b/d versus the previous outlook.
That is not to say that trade growth is not strong this year despite the downward revision. 2022 growth in crude trade is reliant on a range of regions including other Far East stalwarts Japan, South Korea and Taiwan, Europe and North America. Asia must in turn rely largely on Middle Eastern crude to feed its demand upturn, coming from the significant increase in OPEC production.
Given wider market concerns, the risk to our increase in import growth would still appear to be to the downside, at least in 2022. As indicated in Chart 1 we may see growth deferred if further demand deterioration occurs, and/ or policy positions reducing Russian crude intake are enhanced in Europe.
Middle East Dynamics
However, under this relatively benign view of market conditions in 2022, the question of crude sourcing is still a major issue amid the turmoil in Ukraine and subsequent shunning of Russian crude, either through official sanction (e.g. US) or commercial decisions from companies, including a raft of western oil majors, refiners, shippers and traders.
This is where crude flows analysis becomes more involved, but we cannot look at the Ukraine situation in isolation when assessing how global flows are going to develop. Firstly, it’s important to consider the export position of key regions, the key one being the Middle East.
Understanding dynamics in Middle East crude exports is critical to understanding the state of tanker market. Most emphasis in wider oil market coverage is placed on production volumes, but for tanker demand it is exports that count. These things are linked but are not the same, and the reason that their dynamics may be very different at present is that the Middle East is undergoing major refinery capacity expansion.
The Middle East is seeing the ramp-up of massive refinery projects such as Saudi Aramco’s 400 k b/d Jizan refinery and KNPC’s 615 k b/d Al-Zour refinery, with later additions such as Duqm’s 230 k b/d refinery in Oman. These projects are designed to process local crude so, as we have stated for some time, they will draw on production which would otherwise be exported. Gains in Middle Eastern crude exports are therefore going to undershoot those in production.
How do crude exports respond to global events and high oil prices?
Under our Base Case, FSU exports are reduced from the pre-war position, but remain substantial. This assumes continued shipments to Europe via both seaborne and pipeline routes, but volumes are significantly reduced and re-routed. In turn Europe takes in more crude from alternative sources such as the Middle East.
For the tanker sector, this disruption from an ‘efficient’ system whereby European oil imports are sourced from a nearby region, to one where it sources more long-haul imports, is ostensibly positive, increasing tonne-miles. The same can be said for Russian crude exports which are likely to see more intake from Asia, particularly India and China, as a result of increasing Western rejection.
The exact composition of this is obviously difficult to predict, but analysis by Rystad Energy suggests Middle East crude would be best suited to replace lost barrels of Urals crude in European refining markets.
However, there is clearly not an inexhaustible supply of Middle Eastern crude to go round, given the refining dynamics explained above, and wider OPEC+ policy. Tanker market conditions will be heavily dependent on loosening of output restrictions from OPEC. Trade routes will have to adjust according to overall volumes, commercial relationships and bilateral policies.
Did you subscribe to our daily Newsletter?
It’s Free! Click here to Subscribe
Source: Splash247
