Middle East oil producers struggle to compete with US shale production

Bloomberg/Fuel Fix:

The U.S. oil industry is delivering a one-two punch to Middle East producers already reeling from a collapse in prices.

A tussle is playing out in the market for so-called light oils, which have a lower sulfur content and are less dense than heavier varieties. When processed, these grades typically yield a higher amount of fuels like gasoline and naphtha. And now, American supplies are weighing on prices for such crudes as well as fuels made from them.

Light oil pumped in U.S. shale fields is increasingly making its way to Asia, undercutting sales by the likes of Saudi Arabia. Additionally, America is exporting a record amount of refined fuel, contributing to a global glut in gasoline and naphtha. That’s hurting some of the biggest members of the Organization of Petroleum Exporting Countries as they prepare to curb crude output in a bid to stabilize the market.

Middle East producers -- still the dominant suppliers to Asia -- are being forced to tackle American crude competition by lowering their oil pricing to defend their market share. The refiners, meanwhile, are contending with booming U.S. fuel shipments dragging down their returns from making processed products.

“It is no surprise that Middle Eastern producers are having to cut light crude prices,” said Virendra Chauhan, an analyst at industry consultant Energy Aspects Ltd. Over the course of 2018, the key sources of global oil-output growth have included light crude from U.S. shale fields and Saudi Arabia, he said.

While Middle East producers such as Saudi Arabia and Abu Dhabi are reducing the pricing for their lighter crudes, American exports to Asian nations such as India and South Korea are surging. Even a temporary halt by China due to its trade war with the U.S. hasn’t significantly dented overall flows this year.

While the rivalry between Middle Eastern producers and sellers of U.S. oil has intensified since 2016, with even relatively heavier American crudes such as Mars and Poseidon coming to Asia, the competition is particularly stiff for lighter grades. Abu Dhabi’s Murban and Saudi Arabia’s Extra Light have similar fuel yields and chemical characteristics as shale crude.

State-owned Abu Dhabi National Oil Co. cut the premium for 2019 term supplies of Murban crude to 16-18 cents a barrel over its monthly official selling prices, down from about 25 cents in 2018. Government-run Saudi Aramco slashed the premium of its Arab Extra Light grade over Middle Eastern benchmarks to the lowest level in 16 months. They are not only competing with shale flows, but also with new regional varieties such as Umm Lulu and Kuwait Super Light.
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While US exports are up 7 percent this year, they are expected to increase even more as the infrastructure comes online to transport the light crude from the Permian Basin to ports on the Texas coast.  The goal of the Trump administration has been to become a dominant energy player and the US is well on its way to achieving that goal.  It is also increasing its export of LNG to Europe cutting into the Russian market for natural gas.

The US is also increasing its export of refined products.

The light crude will also be increasingly used by ships as they cut back on the higher sulfur heavy crudes because of clean air regulations.