Despite the deal concluded last December between Opec and non-Opec producers, the cartel’s crude oil supply has followed last year’s upward path, said the Bank of America Merrill Lynch (BofAML) in a new report.

The blame for the production surge since March goes entirely to a recovery in Nigerian and Libyan output, leaving a relatively meagre 265,000 barrels per day (b/d) effective cut, added the report titled “World at a Glance” BofAML’s flagship monthly publication highlighting the bank’s forecasts in FX, rates and commodities.

Will this trend continue and will the cartel flood the market with crude as they did back in the fourth quarter of 2016 (4Q16)? Not likely. Nigeria and Libya production simply cannot keep growing at the same pace. In the former, crude loadings are expected to average 1.9 million b/d, implying rather stable output levels into year-end.

“In Libya, we see crude production stabilizing at around 940 thousand b/d in 4Q17. Finally, we expect Saudi compliance to remain strong with a 2H17 average crude output of 10.15 million b/d. So Opec supply should stay at current levels for now,” the report said.

Forecasts: Despite favourable pricing, Saudi lost market share in China

Having said that, if Saudi was to keep crude output stable around pledged levels into year-end, crude exports would mechanically increase, given the average domestic crude oil demand down swing of 470 thousand b/d between July and January.

Saudi has favoured Asian crude oil customers through pricing. Consequently, imports of Saudi Arabian crude oil into OECD Asia have broadly managed to stay elevated this year. Yet, imports of Saudi crude into China have been roughly flat year-on-year (YoY), while total Chinese crude imports have increased by 14 per cent YoY this year. In other words, Saudi has struggled to maintain market share in China.

Risks: as Asian crude imports rise, a market share battle is on

Given the upcoming seasonal uptick on the demand front and stalling or even decreasing crude output in Asia, demand for imported crude in the region is set to increase. In China, crude runs typically increase by 750 thousand b/d between August and December. In addition, Asian crude inventories currently stand relatively low.

Given current prices of similar crudes from various exporting countries, US crude seems to be the most attractive grade compared with Russia (ESPO) and Europe/West Africa (Dated Brent). The US currently has its own constraints as exports terminals are not fully operational post Harvey, but once disruptions clear out, we expect more barrels flowing East. The battle between the US, Middle East, West Africa and Russia to gain market share in Asia likely starts now. – TradeArabia News Service