In Canada, the province of Alberta seeks to get into the oil distribution business; Saudi Arabia deals with maintenance issues that temporarily disrupt production; and the markets wait to see what the White House thinks about Iran’s export numbers. Here are three major issues in the global oil markets that do not involve Venezuela.
1. Bottleneck in Canada
Canadian oil producers in Alberta have long been suffering from bottlenecked pipelines. The lack of pipeline capacity has made it so difficult to transport their crude oil to refineries in the Gulf of Mexico, so much so that the prices of Canadian crude oil grades remains far below Brent and WTI.
The bottleneck also caused such a large build up of stored crude oil in Alberta that the province’s premier, Rachel Notley, declared a rare cap on crude oil production at 3.56 million bpd in December 2018. In February, Notley said that the amount of crude oil in storage had come down, so she was increasing the production quota to 3.63 million bpd for February and March.
The sanctions on Venezuela have increased the demand for Canadian heavy crude, but Canada still faces difficulty transporting that crude oil because no progress has been made on building new pipelines. Notley has since formulated a new strategy to transport more crude oil from Canada by train.
Notley’s plan will cost Alberta 3.7 billion Canadian dollars, as it calls for the province to purchase oil for private producers and distribute it. The plan includes leasing 4,400 rail cars from two Canadian railway companies and buying crude oil from Canadian producers.
Notley believes the scheme will generate $5.9 billion in revenue for the provicnce over three years. She says that the province will have no problem finding buyers for the crude oil. Some analysts are skeptical, because they believe the demand for Alberta’s heavy crude oil is waning.
Some Canadians are upset that Canadian tax dollars would be used, applying the dangerous and inefficient method of transporting crude by rail when efforts should be put into building pipelines.
In fact, many refineries in the United States have shifted towards processing lighter crude grades, but there is still a demand for the heavy crude that both Alberta and Venezuela produce. The sanctions on Venezuela’s oil provide the perfect opportunity for Alberta to unload its excess crude oil. If reliable transportation at decent prices can be assured, Alberta could perhaps acquire long-term contracts.
Some of the U.S. refineries impacted by the sanctions have purchased crude oil from Venezuela’s neighbor, Colombia. However, as the Maduro government hangs on in Venezuela and the sanctions continue, Canadian crude producers should take advantage of the opportunity.
2. Saudi Arabian Maintenance Issues
In light of the news that Saudi Arabia plans to reduce its crude oil production in March, I raised the question last week that Saudi Arabia might be contemplating playing the role of swing producer again. I argued that if Saudi Arabia was indeed intending this, it would not work out well. We now have more information about why the Saudis are decreasing crude oil production, and it appears to be largely due to technical matters rather than a strategy to impact prices.
According to reports from Energy Intelligence, Aramco’s Safaniya offshore field has been shut down for a month, leading to a production loss of 300,000 bpd of oil. Safaniya produces a heavy grade of crude oil. There was little dislocation in the market, because Aramco drew on stored crude and other sources of heavy crude to satisfy customers (including increasing production from its Manifa offshore field).
Repairs to the damaged cable that caused the outage were completed two days ago, but production likely will not resume until March, which is why Saudi Arabia announced that it intends to produce and export less crude oil in March. Aramco will also be taking its refinery at Yanbu offline for maintenance. Yanbu typically processes 400,000 bpd of crude oil, which is exactly the amount by which Saudi Arabia plans to cut production in March.
3. Iranian Export Numbers
Iranian oil exports appear to have stabilized in the 1.4 million bpd range. According to updated information from TankerTrackers.com, Iran exported 1.47 million bpd of oil in January 2019.
Not surprisingly, China was the largest single importer, bringing in a little over 350,000 bpd. This is 68,000 bpd more than it is allowed according to the U.S. sanctions, which explains why some of the ships transporting that oil broadcast false destinations before landing at ports in China.
Notably, no European countries imported any Iranian oil in January. Greece and Italy have been granted significant reduction exemptions (SREs) from the U.S. to import some Iranian oil, but it appears they have not imported any Iranian oil in months.
Preliminary reports for the month of February indicate that Iran is on track to export a similar amount of oil to generally the same customers. As the Iranian exports are settling at about 1.4 to 1.5 mbpd, analysts and traders are wondering: will the Trump administration be satisfied with this or will it seek to force further cuts?