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Middle East 'Oil Circular' Strategy to Cut Crude but Boost Product Exports

OIL

Rystad sees a possible 'oil circular' strategy for Middle Eastern countries suggesting no rush to unwind crude output cuts.

  • Middle East countries have cut crude oil exports as part OPEC+ pledges but simultaneously increased their refining capacities despite uncertain oil demand. The region now exports between 1m and 1.5mb/d of refined products to Asia, Africa and Europe.
  • The Middle East has built a strong strategic advantage with the diversification of profits from the addition of 2mbpd of new refining capacity.
  • The strategy follows that reduced crude oil exports support crude prices to weigh on margins as refineries are not able to run full with less crude of the right quality. Product supply is then impacted as stocks stay low, lifting product prices and therefore boosting the returns from Middle East oil product exports.
  • The strategy keeps oil prices stable and not high enough to incentivise further non-OPEC supply growth. Without “product exports from the Middle East, the impact of export cuts on prices would have been markedly different.”
  • “OPEC+ is probably targeting to keep the market in a backwardation structure, than targeting a high price level. They don’t want a market that come into surplus and that flirts with contango because, once that happens, their levers to control the market become difficult,” said Mukesh Sahdev at Rystad Energy.
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Rystad sees a possible 'oil circular' strategy for Middle Eastern countries suggesting no rush to unwind crude output cuts.

  • Middle East countries have cut crude oil exports as part OPEC+ pledges but simultaneously increased their refining capacities despite uncertain oil demand. The region now exports between 1m and 1.5mb/d of refined products to Asia, Africa and Europe.
  • The Middle East has built a strong strategic advantage with the diversification of profits from the addition of 2mbpd of new refining capacity.
  • The strategy follows that reduced crude oil exports support crude prices to weigh on margins as refineries are not able to run full with less crude of the right quality. Product supply is then impacted as stocks stay low, lifting product prices and therefore boosting the returns from Middle East oil product exports.
  • The strategy keeps oil prices stable and not high enough to incentivise further non-OPEC supply growth. Without “product exports from the Middle East, the impact of export cuts on prices would have been markedly different.”
  • “OPEC+ is probably targeting to keep the market in a backwardation structure, than targeting a high price level. They don’t want a market that come into surplus and that flirts with contango because, once that happens, their levers to control the market become difficult,” said Mukesh Sahdev at Rystad Energy.