OPEC crude oil excesses further due to sluggish imports by US and China

Twelve member nations of the Organization of Petroleum Exporting Countries have maintained their total crude oil production below the target at 30 million barrels per day ahead of its general meeting that is scheduled on 11th June.
Moreover, demand for OPEC crude oil is likely to decrease since imports by two major players - the United States and China may be slowing down in the near term.

Estimated OPEC crude oil production has been below the quota of 30 million bpd since September 2013 except for February.

Global demand for OPEC crude oil is limited due to the increasing supply from non-OPEC producers. Recently, imports by the U.S. is declining sharply and forecasts of Chinese demand is not bright. Petroleum shipments by OPEC members are falling from last year's levels between early April and early June, according to Oil Movements' survey.

In the U.S., regional petroleum demand is slowing down while domestic crude oil production is growing steadily. Moreover, petroleum demand in the country is expected to decrease on year toward the late this year.

The U.S. has been mainly importing OPEC crude oil into the Gulf of Mexico (PADD3) area. However, the region currently does not have enough room to take waterborne crude oil imports since large crude oil flow from inland boosts the stockpile level to the record high.
An additional crude oil pipeline from inland to the gulf area is scheduled to start operation in the near future, so this tendency is likely to be accelerated.

While losing the U.S. market, OPEC anticipated that growing demand from China and other Asian emerging market will offset it. But crude oil processing in India continues to level off after reaching to about 4.5 million bpd in late 2012. Meanwhile, growth of crude oil throughput in China in 2013 remained at 3.3% from a year ago, then slowed to 1.8% growth on year in the first four months period in 2014.

China imported average 6.26 million bpd of crude oil during Jan-Apr, up 11.5% on year, according to the General Administration of Customs. But the high imports caused half million bpd of excess crude oil against processing.

Accumulated excess crude oil during the first four months was more than 10 million tonnes, while commercial crude oil stockpile in China was estimated to gain by about 1.7 million tonnes during the same period. Therefore, 8.3 million tonnes of excess crude oil was likely used to fill up the strategic reserve.

In April, the strategic reserve increased by more than 5 million tonnes, so China's crude oil imports for physical demand in the month were actually fell about 1% on year despite the record high customs data.

It suggests that Chinese crude oil imports will be flat or lower than previous year's level after completing the building of strategic reserve. Thus the country is unable to make up for shrinking demand from the U.S.

On the other hand, some OPEC members like Iraq and Iran are aggressive to increase their crude oil supply. Libya is also expected to resume its supply promptly if current domestic turmoil is solved.

What will other members do? If they maintain the current output levels, total OPEC production will far above the target quota. The excess supplies could depress global petroleum prices as they once were.

Japan's energy demand shows no apparent sign of reaction against tax hike

One and half months have passed after the Japanese government raised consumption tax from 5% to 8%. Many people predicted an aggressive consumption prior to the tax hike and a possibility of reaction after April.

Although Japanese energy demand has been in downward tendency in the past couple of years, both petroleum and electricity demands rose on year in March. Then demand slipped again after April.

However, can we say those were rush demand and reaction against it? Especially, electricity demand significantly fluctuates by weather conditions. I think April data are not enough to be recognized as reaction.

Petroleum demand recorded year-on-year decreases during March and May last year, and is falling further between April and mid-May in this year. Even though, current monthly decreases are still below the average of the past few years.

If we look back on 1997 when the last time Japanese consumption tax rate was increased from 3% to 5%, regional petroleum demand rather increased after the taxation change. Japan's petroleum demand started to decline in late 1997 in step with economic slowdown.

Energy demand in Japan seems not affected directly by the consumption tax increase, once again.

Change of U.S. crude oil stockpile situation

Increase of crude oil stockpile in the United States is depressing prices recently. Market players previously only focused on stockpile in Cushing, but the situation about the U.S. crude oil supplies seem to be changing.

The latest commercial crude oil stockpile in the U.S. nearly reached to 400 million barrels of the highest record, according to the weekly report released by the U.S. Energy Information Administration. The stockpile level is about 80% of current U.S. working crude oil storage capacity. The level was below 70% of the storage capacity in the beginning of this year.

The increase tendency of crude oil stockpile in the U.S. is of course triggered by steady growth of domestic production. Although crude oil throughput in the country has been higher level compared to several years ago, the growth of crude oil production is much faster than that.

Current crude oil supply in the U.S. is concentrated in the Gulf of Mexico area. Total crude oil stockpile as of the end of April in the U.S. rose 1.0% from a year ago. On the other hand, stockpile in the Gulf of Mexico region rose 10.1% on year, while that in the Midwest fell 18.7% from a year earlier.

The contrasting movements were caused by pipeline flows. Previously, crude oil was typically imported into the Gulf of Mexico area then transported to the Midwest through pipelines. But recently, increasing inland outputs are supplied to the gulf region oppositely.

The change of industry and social structure weigh on petroleum demand in the U.S. Fuel conversion to cheaper natural gas also accelerate the tendency.
Meanwhile, U.S. refineries are aggressive to export petroleum products, since their prices are competitive because of cheaper WTI crude oil than global index Brent. Crude oil processing in the Gulf of Mexico area is 10% higher from a year ago. Despite the refinery utilization rate exceeds 90%, larger crude oil supplies are lifting stockpile in the region apparently.

Crude oil imports into the Gulf of Mexico has declined by more than 2 million barrels per day from the levels during 2000s, but it still seems excess.

Current stockpile of crude oil in the gulf area is about 80% of the regional storage capacity. It suggests that the increasing supply through pipelines from the Midwest may cut tanker imports further or encourage the discussion to abolish the export ban for crude oil.

The Obama administration recently postponed decision on the construction of new Keystone XL pipeline that will carry more crude oil from Canada. Many people are discussing environmental issue about the new pipeline, but critical storage problem is also likely to be seen if the new crude oil flow comes into the U.S. without solving export ban.