Add diesel to the commodities flooding global markets from China.
The nation exported a record volume of the fuel last month after already shipping unprecedented amounts of steel and aluminum overseas. The weakest economic growth since 1990 is sapping domestic demand for commodities, while refineries, mills and smelters grapple with excess capacity after years of expansion.
“A lot of it has to do with slowing demand at a time when companies had plans for much a better demand environment, so capacities had been increased,” said Ivan Szpakowski, a commodities strategist at Citigroup Inc. in Hong Kong. “As demand slows, that’s led to an overcapacity in the domestic market and producers have sought to export the surplus.”
Exports of Chinese raw materials are exacerbating a global glut that drove prices to the lowest since the 2008 financial crisis and prompted steel and aluminum producers around the world to protest against the deluge. While diesel exports are principally a risk to Asian refiners, the additional shipments threaten to worsen a glut that already extends from Singapore to Europe and the U.S.
Refining profits, or cracks, from making diesel in the Asian oil trading hub of Singapore have shrunk about 30 percent from a year ago as exports from China, India and the Middle East create an oversupply, according to Ehsan Ul-Haq, an analyst at KBC Advanced Technologies in London.
“The world is becoming an ocean of diesel,” said Ul-Haq. “Demand in China is not as high as it was previously expected. Chinese refiners are becoming more export oriented.”
China’s August shipments of the fuel, also known as gasoil, surged 77 percent from a year earlier to a record 722,516 metric tons, or about 175,000 barrels a day, according to data released this week by the General Administration of Customs. They may rise to about 250,000 barrels a day later this year, according to ICIS China and JBC Energy GmbH, industry consultants.
“Inevitably, this should prevent gasoil cracks in Asia from going higher than they already are,” said David Wech, managing director of Vienna-based JBC.
The surplus may persist if the scandal over Volkswagen AG diesel engine emissions tests hurts demand growth in the longer term, according to Gareth Lewis-Davies, a senior energy commodity strategist at BNP Paribas in London. The German auto-maker was found to have tried to dupe regulators and consumers about emissions of diesel engines installed in 11 million cars worldwide.
“If, as a consequence of the Volkswagen issue, growth of distillate demand is affected, it means it will take longer for the current overhang in distillate markets to dissipate,”Lewis-Davies said by phone. “It has negative implications for distillates only in the longer term.”
Creating Headaches
China’s apparent diesel demand was at the second-weakest pace in a year in August, growing at 3.6 percent from the same month in 2014. By contrast, gasoline demand surged 19 percent, data compiled by Bloomberg show.
“The divergence between strong gasoline demand and weak diesel demand domestically is creating headaches for Chinese refineries,” Amrita Sen, chief oil market analyst at Energy Aspects Ltd., a London-based researcher, said in an e-mail. “This underpinned record diesel exports in August, a trend that is likely to continue although run cuts should ease the pace of exports somewhat early in the fourth quarter.”
China’s economic expansion this year is struggling to reach the government’s target of about 7 percent, with Bloomberg’s monthly gross domestic product tracker at 6.64 percent in August. Industrial output last month missed economists’ forecasts, while investment in the first eight months increased at the weakest pace since 2000.
As growth slows, exports of other industrial commodities have increased. Aluminum shipments rose 22 percent in the first eight months of 2015 compared with the same period a year earlier, customs data showed. The country’s smelters have been increasing output as lower-cost producers build new capacity. Steel product exports over the same period climbed 27 percent.
Singapore was the destination for more than half of China’s diesel exports last month, with shipments climbing 56 percent in the first eight months of 2015. The country’s onshore inventories of middle distillates, which include diesel, have surged to the highest level since 2011. Gasoil stockpiles in independent storage in Europe’s Amsterdam-Rotterdam-Antwerp oil-trading hub are the fullest since 2008, while the U.S. has the biggest distillate fuel inventories in almost four years.
“The Asian diesel market is increasingly oversupplied, with supply growth outpacing demand growth,” said Si Min Ngai, a Singapore-based consultant at FGE, an energy researcher. “With China pushing out more volumes into the market, this adds to the Asian gasoil oversupply, which will inevitably pressure gasoil cracks.”
BobInget on Thu, 24th Sep 2015 7:08 pm
“China’s apparent diesel demand was at the second-weakest pace in a year in August, growing at 3.6 percent from the same month in 2014. By contrast, gasoline demand surged 19 percent, data compiled by Bloomberg show.”
If US gasoline demand keeps growing, it will be five years before 19% GR is reached.
China’s demand remains insatiable.
Here’s a post I’ll share about OUR situation in the coming year.
Shale drilling climbed in a exponential manner from 2010 through the early part
of this year. The result was a hyperbolic increasing production curve. Wells drilled
in 2014 were completed in 2015. CAPEX for 2015 was front loaded into the first half.
The expected decline was delayed and the price bump in June exacerbated it.
The inventory build in the US in the first half was a culmination of years of
drilling. The US & Canada had 5-10 million bbls. of weekly production that ended up
in US inventories. That is all reversing now.
Shale declines approximately 70,40,20% annually. With drilling at 40% of what it
was and completions being delayed the decline becomes the opposite of the build.
it then becomes an hyperbolic decline. Since shale is relatively new and decline
rates differ not only in the same field but also in the numerous shale fields
under development. Throw in conventional and stripper wells and it becomes difficult
for the EIA to come up with any accurate prediction. Part of this is in the models
they use which are backward looking. This is the same reason neither they or the
IEA saw the glut coming.
My prediction FWIW 8,750,000 bbl. p/d. With
that said, if we have a Y/E bounce in price to $65 or so I would expect to see
a number of wells WOC completed. So that number would be off.
Suffice it to say the Red Queen is in action. The finances of the E&P industry
as a whole are a disaster.
The EIA recently stated that 83% of their FCF is going to debt service.
Equipment and crews are gone. It will take at least a year of $75-80 oil prices to put back together even 75% of what we had in 2014.\
By that time shale production will be down as much as 1mm additional bbl. WW production
outside of NA & OPEC will be down 750m bbl. p/d.
We will find production down
as much as 2.5mm bbl. p/d. The cure for low oil prices. And the cycle will repeat again.
BobInget on Thu, 24th Sep 2015 7:23 pm
Saudi Arabia leaves world oil market at risk of price shocks due to low spare capacity at only 1.1 mm bbl/d
September 23, 2015
The world’s safety cushion to compensate for sudden disruptions of global production is historically low, as Saudi Arabia’s spare crude production capacity stands at only 1.1 mm bbl/d, Rystad Energy concluded in its latest oil markets analysis.
“The oil market is at risk of price spikes despite the focus on oversupply. Current spare capacity is far lower than the 2.1 mm bbl/d of spare capacity the Kingdom held in 2009, when the oil market last demonstrated a significant misbalance in supply and demand”, says Nadia Martin, Senior Analyst at Rystad Energy.
Rystad Energy forecasts that when the oil market rebalances next year, it will be with limited capacity to increase production meaningfully in the event of a sudden disruption, leaving the market vulnerable to price shocks.
Key findings of the Rystad Energy report conclude:
Saudi Arabia will again be the world’s largest crude oil producer in 2015, tied with Russia, at 9.9 mmbbl/d production. The US will this year be the world’s third largest crude oil producer. Saudi Arabia last held the position of world’s largest crude producer tied with Russia in 2008, when both countries produced 9.3 mmbbl/d. At that time, Saudi Arabia had implemented a strategy of providing maximum assistance to the market in a year when Brent shot up above 145 USD/bbl. Saudi Arabia’s output level dropped by 1 mmbbl/d the year after, down to 8.3 mmbbl/d.
Saudi Arabia has held the position of holding the largest share of spare capacity in the market. As recently as 2012, Saudi Arabia increased crude exports to ease market tightness as the US embargo against Iran took effect and as EU sanctions were introduced while Libyan exports had collapsed during the Arab Spring. As a result, according to Rystad Energy’s calculations, Saudi Arabia’s spare capacity had fallen to 0.1 mmbbl/d in 2012. The Kingdom was slow to rebuild spare capacity thereafter, increasing levels to 0.4 mmbbl/d in 2013 and 0.8 mmbbl/d in 2014. For a time when there is a “historic glut” in the oil market, Saudi Arabia’s current spare capacity of 1.1 mmbbl/d is low.
While Russia is producing crude at the same level as Saudi Arabia, Rystad Energy does not believe that Russia has production capacity it can increase in the near-term. This is despite Russia’s developing two of the top-ten largest offshore start-ups in 2015 and 2016, Arkutun-Dagi in Sakhalin 1 and Vladimir Filanovsky, respectively. Russian output levels have been surprising to the upside in recent months as the economy struggles and requires maximum USD denominated crude sales to help fight the country’s recession. This further emboldens Rystad Energy’s view that all capacity is being put online.
Besides Saudi Arabia, the US is the remaining producer who can meaningfully increase output in the near-term. Rystad Energy forecasts US crude production of 8.2 mmbbl/d for 2015 and 8.35 mmbbl/d for 2016. In the case of a supply crisis, the US response will occur in three steps: first, within weeks, producers will connect already completed wells to increase output by 100 kbbl/d; second, within a month, producers will complete and connect already drilled wells, so called DUCs, to increase output by 0.5 mmbbl/d; third, with a response time of around a year, producers will increase rig count to increase output by 1 mmbbl/d. While the US supply response to a supply shock could be significant, the resulting oil market volatility could be far greater than expected. The US is a non-crude-exporting nation, and hundreds of companies make individual production decisions.
BobInget on Thu, 24th Sep 2015 8:50 pm
From time to time it’s proper to keep up with India’s insatiable oil demand.
India’s oil product demand rises 7% on year to 3.49 mil b/d in Aug
in Oil & Companies News 23/09/2015
India_flag_01.jpg
India’s oil product demand rose 7% year on year to 13.79 million mt (3.49 million b/d) in August, but was the lowest in terms of absolute numbers this fiscal year (April-March), according to latest provisional data from the Petroleum Planning and Analysis Cell.
Diesel demand is generally low during the monsoon months of June-September, which pulled down the overall oil product demand figure for August.
Commenting on the diesel growth trend for the current fiscal year, state-owned Indian Oil Corporation Chairman B. Ashok told reporters recently, “we are seeing green shoots as far as diesel is concerned … see growth picking up from last year.”
Diesel sales rose 6.3% year on year to 5.44 million mt in August, and gasoline sales surged 10.6% on the year to 1.77 million mt.
LPG sales rose 7.9% year on year to 1.55 million mt, but fell 1.7% from July sales of 1.58 million mt.
Gasoline sales have been rising on the back of higher passenger vehicle sales, lower gasoline prices, and also a shift in preference from diesel vehicles to gasoline ever since diesel prices were deregulated last year, according to PPAC’s monthly sales review report for July.
Except for kerosene and fuel oil, all other major product categories have shown year-on-year growth in demand. But only gasoline has shown a month-on-month demand growth while all other products, except jet fuel which was stable, declined.
Source: Platts
BobInget on Thu, 24th Sep 2015 8:57 pm
Snatched from the internet machine;
CNBC and the floor traders are a symptom of a disease infecting global markets. The financial markets have lost capacity to focus on long term drivers, this is why they missed the oil glut and this is why they will miss oil shortage. For example, there is a fanatical focus on inventories, but inventories are not forward looking indicators, they are backward looking indicators.
Inventories reflect the impact of capex that was mostly sunk in the ground in the $100 a barrel era, they already reflect hedged production, they already reflect easy financing, they already reflect current demand and current supply.
What I am interested in is the future, and how decisions taken today by the industry will effect supply and how economic developments will impact demand.
Today, Total alone removed 200K per day from future supply in 2017, while Kazakhstan lowered its yearly 2016 to 2020 oil production growth target by 3.8m tons (76K barrels per day) to 12m tons (240K barrels per day). Traders think those are just numbers on a press release, but let’s take this minor adjustment in Kazakhstan numbers for 2016, Kazakhstan is now estimating its production to average 77m tons barrels in 2016. 77m equals 1.54m barrels in projected production for 2016. Now, let’s compare that to what Goldman was estimating for Kazakhstan in 2016, Goldman was projecting 1.63m barrels of production for that country, today we learn the number will most likely be 1.54m barrels or 90K lower. This in turn means this obscure announcement by Kazakhstan reduced GS projected excess supply for next year from 400K to 310K barrels or a 23% decrease in the expected glut for next year. And if we add the cumulative impact of the Total announcement and Kazakhstan announcement for 2017, the projected 200K shortage for 2017 more then doubles to 500K.
Are traders adjusting oil prices for 2016 and 2017 based on those fundamental developments? Is CNBC covering these major developments and their impact on the demand/supply balance or are they busy with hearsay on the floor? I think CNBC and the floor traders deserve each other.
Regards,
Nawar
makati1 on Thu, 24th Sep 2015 10:35 pm
Most people don’t give a damn about China or oil news, only the current price at the pumps.
If I remember correctly, diesel is more expensive in the Us than gasoline. Here in the Ps, it is just the reverse. Gas is about $1 more per gallon than diesel and has been for the 7+ years I have been here. It encourages commercial use and discourages car use.
rockman on Fri, 25th Sep 2015 7:06 am
Mak – All a function of what type engines dominate a country’s rolling fleet. That why the EU and US have been swapping diesel and gasoline for decades. With so much US diesel exported that leaves strong domestic demand and thus higher prices. Way back when Henry Ford went with gasoline because at that time there was almost no market for the fuel. It was more or less a waste product of the refining process.
How times have changed, eh? LOL.
BTW a small side fact: US tanks were at a disadvantage to German tanks during WWII. They were run on much more explosive gasoline then the diesel that fueled the Germans. But thanks to ole Henry we had a lot of gasoline production by the time the war came.
makati1 on Fri, 25th Sep 2015 7:58 am
Yes, I was aware of the tank fuels in WW2. Then we switched to diesel also. At least by the time I was driving one in the 60s, they were diesel.
BTW: The M60s were a thrill for a 21 year old to drive. 60 Mph and a suspension that leveled the ride like a Cadillac, but could go anywhere, except through deep mud. But changing a track is NOT like changing a tire on that Cadillac. Whew!
Nice to comment with someone who is educated, experienced and actually knows history.