From Sweet to Sour: The Triangle Trade of Global Crude Oil Markets

From Sweet to Sour: The Triangle Trade of Global Crude Oil Markets

Over the past ten years, there has been an astounding increase in US crude production, from an output of 1.8 million barrels in 2008 to a world-leading 12 million barrels per day in 2018. Global exports in oil are expected to face an interesting development, however, due to the International Maritime Organization (IMO) 2020 global Sulfur Cap due to come into force on January 1, 2020. These new regulations will limit the use of sulfur in fuel oil used on board ships operating outside designated emission control areas to reduce sulfur oxide emissions emanating from ships. This article examines how the new regulations are expected to affect the global trade market for US crude oil.

Triangle trade

Today, over two million barrels per day of crude oil are being exported from the US. The catalyst of this export trend is growing US crude oil production, which is attributed to advances in drilling technology, such as fracking and horizontal drilling. Private ownership of mineral rights and drilling rights in the US, rather than state ownership, has also been a contributing factor and lending to an overall entrepreneurial spirit within the industry. An increase in operating efficiencies has also occurred since the 2015 price collapse of commodities so that exploration and product (E&P) firms can remain competitive. Further, a glutton of shale production in Oklahoma has created a surge in overall US production which has been resulting in a huge price discount to Brent or WTI. These price discounts represent a windfall for US refiners because it provides a source of inexpensive crude which they can then export.

Meanwhile, over in Europe, refiners usually have less conversion capacity, so they tend to produce more middle distillates (about 50% of their runs are distillate-cut). Because they then produce less gasoline and have lower coking capacity, they also have an interest in buying the light, sweet crude oil that is currently coming out of US shale production. Even though the European fuel oil is now undesired by the main markets, the European refiners are beginning to focus on the demand for high sulfur fuel oil from Middle and Far Eastern countries. The International Energy Agency (IEA) predicts that Middle East fuel oil demand for power generation will increase by 3.1% through 2023 which represents between 1.6 – 1.9 million barrels a day being consumed. Bangladesh also has a huge demand for electric power due to a shortage of natural gas in the country. As a result, the country is adding fuel oil and diesel fire generation to help meet its chronic power shortages.

These patterns of global demand set-up a modern version of a potential triangle trade for crude oil and refined products. The US exports large quantities of sweet crude to European refiners, who then run the crude and create fuel oil which is, in turn, exported to countries in the Middle East. Lastly, countries such as Saudi Arabia then export-heavy, sour crudes to America which is in demand by US Gulf Coast refiners. This is because American refiners generally run on heavier barrels due to the new type of shale production having a much higher APR gravity than typical WTI.

The size of crude carriers and terminals are starting to change because of the shifting trade patterns. Ultra-large, or ‘very large crude carriers’ (VLCC) crude carriers are becoming popular because they provide better economies of scale when shipping crude. There have also been proposals and modifications to modify existing terminals and build new terminals, both on- and off-shore.

Making the world go round

While it is true that the IMO 2020 regulations will see the closing of the marine markets to exports of high sulfur fuel oil, there is still considerable demand from Middle and Far Eastern markets. To satisfy this demand, VLCC exports are expected to help optimize domestic US refinery operations because US crude can be efficiently exported. The European refiners can then buy less expensive heavy crude oil and produce greater quantities of lighter products such as gasoline due to their secondary processing capabilities, thus supplying the growing demand from the Middle and Far Eastern markets. And so, the global oil trade markets keep on turning.

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