We’re speeding toward the end of 2015, which means that our monthly oil feature, The Oil Big Five, is increasingly focused on topics that could shape the global oil industry into 2016 and beyond.
This is the November version of our list, which highlights some of the most important and intriguing trends, issues and news in the oil industry, as nominated by our oil analysts and editors in offices around the world. Be sure to leave us your comments, either here on The Barrel or on Twitter with the hashtag #oilbig5. We’re curious what you’re thinking about as the year closes, and what you’re focused on moving into the new year.
1. Nigerian crude
Nigeria is continuing to cast around for new markets for its light sweet crude, which used to be in high demand from the US but has been usurped by domestic production there. Nigeria has the capacity to produce about 3.2 million b/d, but output has remained below 2 million b/d due to a combination of large-scale theft and sabotage of production facilities. One solution was piling more crude onto long-term regular buyers like India and Europe, but the recent government changes in Nigeria and its request for so-called letters of comfort from shipowners who load at its oil terminals seems to have spooked buyers in India and European refiners are shifting to a heavier, more sour barrel. A lack of policy continuity could be devastating to the country’s oil industry, and some have said the plans of President Muhammadu Buhari, who also appointed himself the country’s oil minister, seem more aspirational than certain. As of November 6, there were 10 million-14 million unsold barrels in the Nigerian November program, mostly light sweet grades such as Qua Iboe, Bonny Light and Bonga. Will the overhang continue through the rest of the year, or is there anything the government can do to encourage buying?
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2. Urals market
The percentage of Urals CFD trading concentrated in the prompt market has increased dramatically over several months, reflecting fewer regular players in the market and a lack of certainty for the future of sour crude supply in Europe. One of our oil gurus in London said this is a topic that, “like a pinhole camera, gives a surprising degree of insight on several issues that are normally only visible as through a glass, darkly.” An in-depth Platts analysis of CFD data blocked into IntercontinentalExchange showed the proportion of total volume traded has skewed increasingly toward the balance-month and front-month CFD contracts, both in Northwest Europe and the Mediterranean. As a bit of background, the Urals CFD market acts as a hedging tool for physical Urals cargoes in Europe and is most heavily traded by participants with exposure in the physical Urals market and reflects expectations about Urals differentials independent of Dated Brent. Some factors adding pressure to the market include the fact that Rosneft has been offering up less and less Urals volume each tendering cycle and the concern that an end to sanctions against Iran could add volatility to the European Urals market. Does this shift act as a canary in the coal mine and signal even further changes coming to the Urals CFD, and Urals physical markets, and to the sour crude market as a whole?
3. Colonial Pipeline shippers and space
Colonial Pipeline, the US’ largest refined product pipeline, is of perennial interest to gasoline, diesel and jet shippers and the like. The system transports more than 100 million gallons of fuel each day, stretching from Houston, Texas, to Linden, New Jersey. Finding space on the pipeline can sometimes be difficult, but at the end of October the company announced plans to reduce its minimum tender batch size to 15,000 barrels from 25,000 barrels, which will let more market players secure capacity. The proposal still requires federal approval, and could squash the transfers of small stakes of line space shipper history on portions of the system, but the new rules are expected to come into effect in December. There are also preliminary proposals to increase the minimum delivery size to 5,000 barrels on spur lines, which could squeeze out smaller suppliers who deliver small batches to multiple Colonial Pipeline spur lines. On a semi-related note, on November 5 line space on Colonial Pipeline’s distillate Line 2 was assessed by Platts at a 2015 low on a tighter spread for US Gulf Coast/Atlantic Coast ULSD. It will be worth watching how shippers could change as new size requirements go into effect, as well as what could happen to the value of space on the pipeline giant.
4. China’s gasoil exports
China’s gasoil exports hit a monthly record of 1.11 million mt, or roughly 275,650 b/d, in September, nearly five times higher than exports a year earlier and up a staggering 54% from the previous record of 722,520 mt in August. It appears the exports are in a position to remain elevated through the rest of the year, in part due to weak domestic demand, overflowing inventories and rising output. While demand for gasoil may be weak in China, demand for gasoline and jet fuel is increasing there, and gasoil output rose 3.3% during the first nine months of the year as a side effect of the higher production of the more refined products. China’s exports are also up despite some sources claiming Chinese refiners are losing money on them and would be better off selling domestically. But new buyers are emerging for the product — while traditional Southeast Asian countries are still importing, China also made its first substantial gasoil exports to Guatemala earlier this year, and Papua New Guinea, Togo, Taiwan and Australia have also picked up more product. How long will the gasoil exports continue at such a pace, and what new buyers could emerge in the near future?
5. Jet fuel and Mexico
The aviation industry had its semiannual IATA Fuel Forum in Cancun recently, which was apt as there was discussion about how Mexico’s energy-sector reforms could increase competition in the jet fuel market and improve supply chain services. The jet fuel supply chain is currently largely divided between Mexican state-owned companies, but allowing additional competitors and retailers to bring in and distribute jet fuel could reduce supply chain problems, such as difficulties meeting airlines’ fuel quality standards and a lack of measures to limit fuel contamination. Opening the market should also make more jet fuel available to Mexico as its airline industry grows; a planned new international airport in Mexico City has a targeted start of commercial operations in 2020. And what of prices? A significant portion of Mexico’s jet fuel is imported, and domestic refining capacity is not expected to grow to fill increased demand, so considerable investment in infrastructure for new distribution would likely be necessary, keeping prices from falling too much. But now that some of the world is poised to enter winter, what’s nicer than envisioning more flights to beautiful destinations in Mexico?