22 May 2019 17:58

U.S. sanctions led to deficit of heavy oil, as premium on Urals crude shows - Novak

MOSCOW. May 22 (Interfax) - The United States' sanctions on Iran and Venezuela are leading to a deficit of heavy oil for the refining sector, including in the U.S., as premiums on Urals crude and rising WTI discounts on Brent show, Russian Energy Minister Alexander Novak said in an interview with the newspaper Asharq al Awsat.

"Sanctions and other geopolitical factors have already led to a situation where the refining sector is experiencing a shortage of heavy oil, which used to be imported from Venezuela and, in part, Iran - this problem is especially relevant for the U.S. It's hard to say through whom deliveries of heavy types of oil will be resumed, but their deficit is confirmed by the positive premiums on Urals and rising WTI discounts on Brent," Novak said.

Bloomberg has reported that Russia is increasing its exports of oil to the U.S. as Venezuelan deliveries decrease. According to Managing Partner of Caracas Capital Markets Russ Dallen, in the first half of May, 13 tankers delivered almost 5 million barrels of Russian oil and oil products to the United States, and additional oil is now on the way. Dallen estimates that American refineries could triple their acceptance of Russian oil this month. In January-February, Russia exported about 16 million barrels of oil and oil products to the U.S., compared with 20 million a year before.

"I think that in just the first half of 2019, it will become clear at what level Iran's production and exports will stabilize. The production situation in Venezuela remains unclear, and we're expecting production in the U.S. to increase after the period of restrictions related to infrastructure at the Permian [Basin in Texas and New Mexico] ends in the third or fourth quarter of 2019," Dallen said.

Novak said, "Oil production in the U.S. continues to grow, and an analysis of the structure of production shows that growth will continue in the medium term."

"And we mustn't forget that the volume of shale oil in the U.S. is fairly sensitive to the price of oil, although, thanks to greater production efficiency and the improvement of technology, the breakeven point for shale production has fallen significantly," he said.

Discussing what will happen to the oil market in the medium term, Novak said, "The most important risks for demand for oil could arise due to the slowing of the global economy in the next few years."

"Among economic factors, we can note the beginning of a slowdown in growth of global trade and an escalation of trade conflicts between the U.S. and China. These factors, together with increased political uncertainty in a number of regions of the world, indicate the vulnerability of the global economy to further shocks. The lack of predictability and understandable rules of the game always lead to a worsening of the investment climate and decreased investments, and this, in turn, leads to slower economic growth," Novak said.

"So much for global factors. But there are also, of course, industry-specific factors, ones related to energy. Above all, these are increased competition, as well as gradual growth of the share of production of untraditional reserves - that is, reserves with high production costs. Although the Middle Eastern countries with the lowest production costs will probably become the main driver of the trend in the supply of oil, the influence of production in the U.S., above all shale oil, could strengthen," he said.

"Additionally, long-term environmental, energy-effectiveness, and inter-fuel competition will play a role in the market. For instance, on the subject of the environmental friendliness of energy, it's worth taking into account the change in standards for sulfur content in marine fuel from 3.5% to 0.5%, which will lead to the partial replacement of high-sulfur fuel oil with diesel, LNG, and other, cleaner fuels. Renewable energy is also developing quickly. It can't replace oil and gas yet but will lead to a fiercer competitive battle among energy sources," Novak said.