Another battle opens up in the oil markets | GulfNews.com

New York: As a test of wills between Opec
nations and US shale drillers fuels a global oil market slump, a brewing
battle between Canadian and Saudi Arabia heavy crudes for America’s
Gulf Coast refinery market threatens to drive prices even lower.

Two factors will come into
play over the next few weeks: From the North, new oil pipelines will
pump record volumes of Canadian crude to the southern refineries, many
better equipped to process heavy crudes than lighter shale oil.

From the Middle East, top
exporter Saudi Arabia is offering crude at discounted prices in an
attempt to defend its remaining share of the important regional market,
which has shrunk by more than half in recent months.

“So far, the Gulf Coast has
suffered from an oversupply of light oil, but now there’s competition
for heavier crude,” said Sandy Fielden at RBN Energy. With the Saudis
already facing fierce competition for their light grades, the arrival of
Canadian crude “could add insult to injury”, he said.

Saudi Aramco has stepped up its
counteroffensive, cutting its monthly US-bound price for Arab Medium for
a sixth straight month, putting it at the deepest discount against the
regional sour crude benchmark since December 2013.

The timing of this clash may
magnify its market impact as Houston-area oil refiners shut down for
maintenance in early spring, further reducing their demand by an
estimated 1 million barrels a day (bpd). “We’ll see that overhang into
the summer, at least,” said one physical crude trader.

That will put further pressure on US prices and may spur investors in New York and London to extend a sell off in crude futures.

The looming clash of barrels
comes at a time when oil markets already face a global glut expected to
last for a year or longer. Large volumes of foreign heavy oil reaching
the Gulf Coast will give many US refiners more choice after they have
upgraded their systems to process cheaper, heavier crudes. The new
supply also marks a breakthrough in Canada’s years-long effort to bring
its growing Alberta oil sands crude output to new markets.

Enbridge Inc.’s 600,000 bpd
Flanagan South pipeline, which runs from Illinois down to the Cushing,
Oklahoma, oil hub began commercial service on December 1. Enterprise
Product Partner announced that its 450,000 bpd Seaway Twin pipeline from
Oklahoma to Freeport, Texas, shipped its first volumes on December

21.

That promises another quantum
leap for Canadian crude after its US Gulf Coast sales already hit a
record 274,000 bpd in October, nearly three times as much as a year
earlier, according to US data.

The new flows will compete
with other crudes as well. Some refiners see Saudi’s medium crude as a
more direct substitute for Mexican and Venezuelan crudes.

However, some refiners are
likely to blend oil sands crude with overabundant super-light US
condensate, creating medium blends that may rival Saudi Arabia’s main
grade, said Citi global commodities strategist Ed Morse. He warns the
clash could set up another tumble in global prices.

The growing pressure on the Gulf market is already showing up in pricing and inventories.

Mars Sour, a domestic grade
similar to Arab Medium, has fallen to a discount of $1.90 (Dh6.97) a
barrel compared with US crude futures after trading at a premium over 45
cents two months ago.

Crude oil inventories in the
US Gulf have risen to nearly 200 million barrels, a record high for late
December and up some 15 per cent from a year earlier. The build-up
comes as Saudi Arabia shifts its focus to fiercely defend what remains
of its market in the US — the world’s largest consumer of oil.

Until recently, it seemed to
be holding its own in part thanks to a major expansion of its
joint-venture Motiva Enterprises refinery. Saudi crude sales to the US
Gulf rose by a third to a record high of nearly 1 million bpd in the two
years to 2012, a period where gushing shale production had begun to
displace foreign suppliers.

But this year it has begun to
lose ground, with shipments tumbling to 461,000 bpd in October, data
from the US Energy Information Administration showed.

Ironically enough, the
decline was driven partly by a one-third cut in imports by Motiva,
jointly owned by Saudi Aramco and Royal Dutch Shell. Other customers
have also turned away.

Valero Energy Corp.’s cut
imports by 85 per cent in the first 10 months of 2014, with Saudi
purchases falling to just 35,000 bpd, according to EIA data. Marathon
Petroleum Co. cut Gulf Coast imports to 33,000 bpd in October from
205,000 bpd 10 months earlier.

While most Saudi customers
agree on annual contracts with little room to reduce purchases, the
Kingdom’s state oil firm knows it needs attractive prices to retain
long-term buyers.

“As refiners look at Canadian
crude availability long term, they’ll be thinking about ways to give
themselves more options” said Richard Mallinson, an analyst at Energy
Aspects in London.

Another battle opens up in the oil markets | GulfNews.com