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In line with our expectations, global waterborne crude oil exports were higher m/m in November at 48.10 mb/d, up by 1.38 mb/d m/m for waterborne and pipeline. OPEC producers pushed out more volumes to compensate for Iranian exports disappearing as US sanctions officially restarted on 5 November. The surge in global exports has left the market oversupplied, with Saudi Arabia increasing its exports m/m by 0.78 mb/d, the UAE by 0.57 mb/d and Kuwait by 36 thousand b/d—more than the 0.61 mb/d drop in Iranian exports m/m. Crude flows were higher but also of the ‘wrong’ type, with heavy sour barrels replaced by lighter sweet/sour molecules.
Indeed, with the rise of light sweet exports from US PADD 3 to 2.3 mb/d in November and despite refiners’ best effort to tweak refinery yields, the market is now long on gasoline and naphtha, with diesel and, very unusually, fuel oil the stars of the market. Therefore, naphtha- and gasoline-rich grades are suffering, as seen during the December trading window. Grades such as Urals are trading above lights whilst Murban, Ekofisk, WTI Midland, Agbami and Saharan Blend are struggling more to find buyers, leading to a drop in their differentials.
Freight rose this month as bad weather kept a few cargoes away from the market for longer. This is not an unusual occurrence this time of the year, as Russia and the Mediterranean often experience loading issues in the winter, but with more long-haul voyages from the Atlantic to the east and higher volumes being shipped from the Middle East to Asia, the rise in freight was quicker and stronger. Suezmax were the first to go, with the Mediterranean and Russian routes reaching new highs before spilling into the WAF trade. Now VLCC in the Middle East and Aframax in Northwest Europe are also experiencing a hike in rates as liquidity is limited.
In the coming months, following the truce on the US-China trade war, Chinese buying of crudes from the US will reach significant amounts again. In the past, China took up to 0.4 mb/d of light sweets from PADD 3, but Chinese refiners have the capacity to absorb higher volumes of US crudes. Starting with December loading barrels, increased imports of US crudes into China will displace North Sea, West African, Brazilian, Russian and Libyan grades. However, this will also mean less US exports to Europe, as Europe has indeed become the sink for US exports that do not make it to Asia. Higher US to China flows also mean VLCCs will be tied up for longer.
On 7 December, OPEC+ agreed to cut 1.2 mb/d of production with exemption for Venezuela, Iran and Libya—where production is already falling—but Saudi Arabia and UAE will compensate for the 0.14 mb/d cut that these three countries should have done. Saudi Arabia’s exports alone will fall by 1.1 mb/d from November to 7 mb/d in January. Initially, most of the cuts will impact western markets as Asia remains the mainstay of OPEC demand. Overall, up to two-thirds of the cuts can be in light crudes, which should help address some of the light overhang.
From January onwards, crude demand is set to fall. US kicks off the turnaround season with PADD 3 maintenance higher y/y at over 1.16 mb/d in February. Asian refineries will enter a heavy season of refinery turnaround with at least 1.5 mb/d of CDU capacity offline each month in March and April. So just as the US pushes out significant volumes of crudes backed out due to turnarounds, demand will be falling in Europe and in Asia. US crudes will have to discount to flow.