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Global waterborne and pipeline crude oil exports were lower by 2.38 mb/d m/m in January at 45.05 mb/d. OPEC+ agreed on 6 December 2018 to lower production levels by 1.2 mb/d and their exports have been gradually falling ever since. Iran struggled to maintain export levels in January as only a few refiners took advantage of US waivers and as bonded storage in China likely filled up by end-December. In Libya, the Sharara field remained closed amid security issues, removing 0.3 mb/d of sweets from the market, but we expect Sharara to return by March at the latest.
Late in January, swiftly enacted US sanctions on Venezuelan oil shipments, aimed at removing of President Nicolas Maduro from power, further affected OPEC exports. At least 0.5 mb/d of Venezuelan crude still moves to the USGC, primarily into refineries around Lake Charles. USGC plants will be unable to easily find alternatives for those heavy Venezuelan supplies, and certainly not at such a low cost. Some plants will pull more Colombian or Mexican sours, starving Asia, while others will turn to medium sweets from Africa or Brazil to blend crude feedstocks with rich distillate cuts into their slates. We count three recent movements into Sweden and Spain that will supply sophisticated plants for Nynas and Repsol. India and China both have the capability to run Venezuelan volumes, but India is struggling with shipping and banking restrictions. Shipowners are reluctant to dock at Venezuelan ports and wish to steer clear of sanctions. Even if more exports could be redirected, the loss of US diluent for blending purposes, which was also sanctioned by the US, will cut production by over 0.3 mb/d quickly.
Meanwhile, ports in the Mediterranean and Black Sea dealt with weather disruptions that suspended their January exports, leaving over 35 mb stranded in the Black Sea. However, record US exports into Europe rushed in and filled the gap, and less North Sea oil was exported.
Most of the lost crude oil supplies worldwide are medium and heavy sours, which the market continues to grow short of amid the OPEC+ cuts, the production curb mandate in Alberta and four new sour refineries beginning operations this year in China, Malaysia and Turkey. New crude production in 2019 will mostly add light sweet supplies, primarily North American tight oil. In January, US exports reached 2.36 mb/d with approximately 1 mb/d sailing to Europe, as refiners there switched from sour to sweet amid strong sour crude pricing, regional shipping delays and losses from Libya. This is leading to an increasing quality mismatch with unanswered sour demand. Sweet–sour spreads have compressed materially because of this, and we estimate that the lion’s share of sweet refining capacity has been exhausted. For the remainder of Q1 19, crude oil demand should fall as refineries enter peak turnaround season, especially in March and April, with 6 mb/d and 5.7 mb/d of CDU capacity offline, respectively.
Once the bulk of the refinery maintenance is over and new refinery capacity ramps up, sour demand will return even stronger. Differentials and OSPs for sour supplies should continue to increase and anchor the overall market. The tightness in sours recently flipped Dated-Dubai into negative territory and continues to compress sweet–sour spreads—such as LLS–Mars, Ekofisk–Urals, and Murban–Dubai—an early sign of what is to come. All of this is occurring ahead of IMO with a growing shortage of distillate-rich crude, which means Brazil and West African grades will be in high demand, particularly in Asia. World trade flows will race to address these imbalances.