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The Global Oil Export Balance is Changing

by | published August 13th, 2012

The prices for crude oil and major oil products (like gasoline, diesel, jet fuel, and heating oil) continue to advance. And some interesting changes on the supply side are emerging.

Traditional raw material providers are moving to supply international markets with value-added processed products.

Russia is the clearest example of this transformation in the oil-export balance, but it’s hardly the only one. Saudi Arabia and Kuwait have also embarked on major refinery upgrades and expansions.

The Russian experience is the most instructive on where the global market is moving. In the process, it will change how we trade gasoline and the price at the pump in other parts of the world.

Even in the U.S.

One of the world’s two top crude oil producers (the other being Saudi Arabia), Moscow has lately reserved more of its own production for refining inside Russia.

The transformation has been startling.

Only a few years ago, 42 of the 49 main refineries in the country could not produce anything beyond Euro-2 grade gasoline and diesel. That meant Russia had the unenviable prospects of having to import high-octane gasoline in the near future, given the increasing number of newer, more demanding auto models.

Russian refineries were producing too much mazut (low-level, “black” heating oil) and not enough high-grade gasoline. The volume they were producing had high sulfur content and low octane ratings. This combination had an irritating habit of blowing out decent engines.

Russia Upgrades it Infrastructure

Almost three years ago, the Kremlin decided to change emphasis radically. It demanded considerable investments in the refinery infrastructure to upgrade the processing cut (how much of the crude throughout can be used for oil products). Previously, half or more of the crude moving through a refinery was simply exported because the facility could not do anything with it.

However, the introduction of sophisticated (and expensive) modern technologies is transforming the Russian refinery sector. It is now beginning to export large amounts of oil products to the international market.

There are also major new export pipeline and terminal systems designed to do just that. Russia will continue being a dominant exporter of crude oil. But it is also counting on a rising trade in oil products to improve the balance of payments.

And there is reason to believe this will take place. Nearing completion is the huge East Siberia-Pacific Ocean (ESPO) pipeline system. Already more than half-completed with a spur line moving crude to China, the system will end at the port of Kozmino on the Russian Pacific coast, where it ends with both a seaport and a huge new refinery.

The Russians plan to become a major player in refined products throughout both the Asia Pacific market and as far away as the U.S. West Coast and even Latin America. ESPO-sourced gasoline and diesel fuel will begin appearing throughout the region. On the other end of the country, Transneft (the national oil pipeline monopoly) has completed the Baltic Pipeline System-2. BPS-2 will expand capacity for crude oil exports moving west. The BPS system moves oil to the Primorsk area on the Gulf of Finland up the coast from St. Petersburg. Now, however, the increased system will also be moving oil products abroad.

Moscow has changed the taxing and export duty structures to favor crude processed domestically, rather than merely moved abroad. After all, it is easy to see how more expensive value-added oil products being exported would improve the national budget even more than lower-priced raw material.

This is the scenario moving forward. Primary oil lifting countries like Russia and Saudi Arabia will increasingly move into exporting oil products, as a way of diversifying what still would remain a natural resource-based economy.

This is already having a pronounced impact in other parts of the world. It makes little sense to propose a major new refinery project – an undertaking that would cost billions and take a decade or more to build from scratch – if the product can be secured more cheaply via imports.

Of course, that also has some national market security concerns, since it would replace being dependent upon foreign crude for a similar rising reliance on the importing of outside oil products.

Yet it is underway.

Russian Volumes Will Impact Global Markets

The U.S. market increased imports of gasoline to their highest levels ever earlier this summer and is poised to do so again. These imports were coming from Europe. There the refining margins (the difference between the cost of production and the wholesale/retail price of the resulting fuels) were so narrow that some plants were going bankrupt. Gasoline and diesel could be gained more cheaply than expanding production at certain refineries back home.

The rise of Russian volume – first in the Asian and other “near abroad” markets and then more widely – will have the advantage of putting some restraint on what will otherwise be an almost inevitable escalation in retail prices.

On the other hand, this new market trade balance will have some still unknown consequences of a broader geopolitical and cross-border economic nature.

Nonetheless, don’t be surprised if the rise of refinery production abroad results in some new approaches to crafting international vertical oil companies. Those developments, along with the secondary results in support, equipment, and distribution, are going to open new investment opportunities for us.

I’ll be tracking them for you.

Sincerely,

Kent

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  1. August 13th, 2012 at 13:35 | #1

    where are the best places to purchase gold, so that you can keep it on hand yourself?

  2. Fran
    August 13th, 2012 at 14:04 | #2

    Mr. Kent I wonder if you still recommend to hold Surguneftegas as you see any progress in the stock in a short future. Thanks in advance.

  3. Anthony
    August 13th, 2012 at 14:56 | #3

    Like your Articles very much.
    Sometime ago I invested a small amount in GOO.
    What do you think of their share prices increasing for Gold Oil (GOO)
    News is Z34 looks good for end of August? low production though!

  4. Paul D
    August 13th, 2012 at 16:24 | #4

    You failed to discuss the environmental consequences. Are the refineries in Russia and Saudi Arabia as clean as those in Europe or the US? Also, what is the environmental consequence of shipping refined oil instead of crude?

  5. August 13th, 2012 at 16:45 | #5

    I wish to buy Gold but am only interested in holding physical gold.WEhere is the best place to buy.

    Andrew Jacobsen
    New Zealand

  6. Michael Upper
    August 13th, 2012 at 18:09 | #6

    Kent

    Are the Russians by chance doing the same thing with LNG?

    Thanks, Michael Upper

  7. August 14th, 2012 at 02:22 | #7

    Good to hear from foreign lands that Russia is at long last doing something sensible with its crude oil resources.

  8. tom hague
    August 14th, 2012 at 02:49 | #8

    essr will it recover

  9. enthusceptic
    August 14th, 2012 at 09:10 | #9

    Still some are trying to get free advice – some things never change – and there are other Money Map contributors who talk about gold.
    Gasoline crossing the Pacific on a boat, seriously? Maybe gasoline from Russia and nat. gas from the US can work for some years until production can start of large ng deposits all over the world. Large parts of the world use ng to power light vehicles.
    I read not long ago that FRO was buing tankers. Go FRO – and others – but remember that shipping is a volatile business.

  10. Joseph
    August 14th, 2012 at 09:24 | #10

    Hello, Could you forward me the best place to buy physical gold?

  11. August 19th, 2012 at 15:26 | #11

    Am worried about money market accounts. Most of us consider money markets as cash, but are they safe? If not where would you recomend to put cash.

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