US crude on tap — but who’s buying?

Tugboats berth an oil tanker at Qingdao port in China. US crude exports to China have fallen by more than two-thirds due to the trade war and economic weakness worldwide. (AFP)
Updated 20 August 2019

US crude on tap — but who’s buying?

  • US crude oil exports have surged to more than 3 million barrels per day since a 40-year ban on the practice was lifted in 2015

NEW YORK: Two long-awaited pipelines out of the busiest US shale patch started shipping oil to Gulf Coast export hubs last week — just as US crude barrels suddenly do not look all that attractive to buyers around the world.

The two lines, which run from Texas’ Permian region to the US Gulf Coast, alleviate bottlenecks that prevented oil from getting to the coast amid a surge in US exports. Still, due to a series of factors in global oil markets, the increased access to the Gulf is making US exports less competitive, if only temporarily.

US crude oil exports have surged to more than 3 million barrels per day (bpd) since a 40-year ban on the practice was lifted in 2015. But global buyers still use the US crude benchmark, delivered to and priced at Cushing, Oklahoma, nearly 800 km from the coast — as an arbiter of whether it is attractive to buy US barrels. Right now, it isn’t.

The primary motivator for buying US barrels is the discount on Cushing-based West Texas Intermediate (WTI) to the international Brent benchmark. That spread was more than $11 in late May, making for a wide arbitrage that shippers took advantage of by purchasing barrels in Texas and selling them into Europe or Asia.

That spread has since collapsed to just under $4 a barrel, and the new pipelines are part of the reason. Because Permian oil producers are now sending those barrels to the Gulf, the reduced flow to Oklahoma is boosting the price of Cushing futures. In addition, Midwest refineries have been running at near full capacity, and they source barrels mainly from Cushing.

Adding supply to the Gulf Coast has made prices there cheaper — by some measures. The premium on oil delivered at East Houston, called MEH, in comparison with US futures delivered to Cushing has declined, but the overall narrowing in the WTI-to-Brent spread has canceled out that move.

The spread between MEH and international benchmark Brent has contracted to near its tightest since May as Brent has also weakened due to recent muted buying in European markets.

“Export arbs, like MEH-Brent, have compressed to levels that discourage exports. We think export arbs will likely need to widen out going forward in order to help clear rising supplies of US tight oil,” Bank of America Merrill Lynch analysts said in a note.

Pipeline operators Plains All American Pipeline and EPIC Midstream Holdings have begun commercial deliveries on lines that can carry over 1 million bpd of oil to the Gulf Coast from West Texas.

The new pipelines have also pushed the price for West Texas Intermediate (WTI) at Midland — the heart of the shale region — to its highest level since February, making it less profitable to ship to Cushing.

As a flood of oil arrives at the coast instead of at Cushing in coming months, it may further narrow the spread between US and Brent futures, dealers said. That would hurt exports as well. US crude exports in the week ended Aug. 2 fell to a 10-month low of 1.87 million bpd, according to government data, before rebounding a week later.

US exports may also be sliding due to the effects of the US-China trade war and economic weakness worldwide. US crude exports to China through May averaged 108,000 bpd, compared with 350,000 bpd for the same period last year, according to US government data.


Minister: ‘Mind-blowing’ prospects for Saudi mining

Updated 25 January 2020

Minister: ‘Mind-blowing’ prospects for Saudi mining

  • Bandar Alkhorayef, the Kingdom’s minister for industry, says multibillion riyal program underway

DAVOS: The opportunities presented by Saudi Arabia’s mining industry are “mind-blowing,” the country’s minister for industry and mineral resources told Arab News.

Speaking on the sidelines of the World Economic Forum in Davos, Bandar Alkhorayef — who was appointed to the newly created post last summer — said many of the Kingdom’s mineral resources were “untapped,” and that a multibillion-riyal investment program was now underway to find and exploit new sources of natural wealth.

Saudi Arabia has launched a five-year geological survey of its natural resources, hoping to identify and quantify new wealth in the form of gold, phosphates and other valuable minerals.

Some experts believe that the Kingdom could be a source of precious earth metals valued in hi-tech production processes.

If these are found in significant quantities, it could help stimulate domestic high-tech manufacturing processes in Saudi Arabia.

“The government has linked mining with industry. We’ll export raw materials of course, but we’re more interested in the wider value chain,” Alkhorayef said.

A new mining law will soon be enacted, allowing for a revamped regulatory regime in the mining industry, and new investment in mining infrastructure that could reach tens of billions of riyals, he said, adding: “It shows you how serious we are about the mining industry.”

He joined the government after 26 years at the top of private sector business, with the Alkhorayef Group industrial conglomerate.

“The core of the Vision 2030 strategy is to diversify the economy, and industry and mining are key parts of that. My view as a minister is to be an enabler for the transformation of those sectors,” he said.

A key agency is the Saudi Industrial Development Fund, which aims to distribute funds to the private sector to encourage expansion.

Its available capital has been increased from SR65 billion ($17.3 billion) to $100 billion, and its mandate has changed to cover new industrial and technological sectors, Alkhorayef said.

“Both industry and mining are capital intensive and need long-term stability and visibility. Our aim is to be profitable in order to compensate investors for the risk they take,” he added.

 

“Investors always look at risk and return, and they make decisions based on that. Our vision is to open up opportunities for local and foreign investors.”

His ministry is also closely involved in the rollout of the National Industrial Development and Logistics Program, the big strategy to transform the Saudi economy launched a year ago by encouraging investment in economic growth via the creation of special economic zones across the Kingdom.

“It’s going great,” Alkhorayef said. Two zones have already been opened in Riyadh and Jeddah, and there are further projects under review.

He met with investors in the logistics sector while in Davos, and further investment is expected.

He said in Saudi Arabia’s case, the advantages presented to investors by the Kingdom’s natural resources, demographics and geographical location outweigh any geopolitical risk.

Alkhorayef added that it is relatively risk-free in terms of currency fluctuations because of the dollar peg and freedom of capital. “I worked in a global company, so I understand those kinds of risks,” he said.

Decoder

Saudi Arabia’s National Industrial Development and Logistics Program

The National Industrial Development and Logistics Program aims to transform the Saudi economy by encouraging investment in economic growth via the creation of special economic zones across the Kingdom.