JPM Sees Incremental Saudi Crude Supply Offset By Declines In Iraq, Iran Production

Tyler Durden's picture

While the market appears to be happy with promises for incremental crude output by Saudi Arabia which has now broken off from the broader OPEC cartel and is doing its own pro-US thing, JPMorgan, which at last check still had a Brent target of $130/bbl, once again introduces an unpleasant dose of reality in the crude story by noting that any increase in crude output by the rogue OPEC state may be offset by production drops in Iraq and Iran. Will Saudi now promise to offset even that drop and hike output to 11 mbd or some other more unbelievable number? Stay tuned for more lies from the "peak oiled" kingdom.

From JPM's Larry Eagles:

Reports vary, but there are indications that Saudi Arabia is poised to increase July crude production to 10.0 mbd. This is not confirmed, and it greatly depends on how they offer it to the market, i.e. are buyers willing to take additional crude at OSPs. If the Saudi increase materializes, the market appears better balanced, as we projected a 600 kbd 3Q2011 shortfall at Saudi production of 9.2 mbd. But developments elsewhere leave us cautious.

First, Iraq is critical to incremental supply, adding about 500 kbd over 2011-2012. Production continues to ramp up, but exports recently hit one of the hard constraints we have flagged for some time. The Basrah loading terminal is said to be operating at maximum capacity, with some additional volumes from Khor Al Amaya terminal. This is limiting southern exports to about 1.7 mbd. Relief will come with new single point moorings (SPM), but the first is not likely to come online until late 2011 at the earliest. Some reports show it coming online in mid-2012. Once it comes online exports should surge, but in the meantime our 3Q and 4Q2011 production outlook may need to be scaled back by 120 kbd and 240 kbd, respectively.

Iran is another piece to the puzzle. Iran reportedly drew down floating crude storage by some 12-14 mb in May. Floating storage stood at about 6 mb at the end of May 2011 versus 30 mb in May 2010. Over June-September last year, Iran reduced floating storage by 26-28 mb. This cannot be repeated in summer of 2011.

And some other news flow analysis from JP Morgan:

Several news points of interest from China: (1) China’s M2 money supply growth continued to moderate to 15.1% in May, down from 15.3% in April. New loan creation fell to 552 billion yuan in May compared to 740 billion yuan in April. (2) The NDRC reports that May refinery throughput was up by 4.4% yoy. It calculates implied oil demand rose by 5.2% yoy. (3) Surveys point to a 5% mom reduction in crude throughput in June. This is consistent with an increase in refinery turnarounds to 650 kbd in June and July versus 160 kbd in May.

Analysis:

(1) Chinese policy continues on a path of measured slowing as expected. Our economists expect an uptick in May inflation (announced tomorrow, June 14) to 5.4%. Inflation is expected to peak in June or July. (2) The NDRC data often varies quite widely from the final NBS data. Our May implied demand growth projection stands at 9% yoy, consistent with expected strong crude runs on limited turnarounds. (3) The refinery survey data highlights a dilemma for China. We expect demand to rise by at least 200 kbd qoq in 3Q2011 as refiners are moving into maintenance. The government has taken measures to limit exports to ensure steady supply, but a sharp drawdown in stocks is likely and imports may be required.

 

Naphtha cracks (versus Dubai crude) continue to retreat. Cracks dropped below -$6/bbl, over $9/bbl down on mid-May highs.

Analysis:

The drivers behind weak naphtha cracks are manifold. As expected, a ramp-up in natural gas liquids production is finally having an impact, as is substitution by LPG. Unplanned cracker outages in Japan and Taiwan are also impacting naphtha demand. The critical driver, however, is the sharp pullback in industrial production (IP) following a period of inventory building in finished goods over 4Q2010 and 1Q2011. Our economists expect some relief in the 3Q2011 as IP is projected to rise by 5.2% yoy following 4.1% growth in 2Q2011. Naphtha should see support end year as IP continues to rise to 5.4% and the seasonal rise in LPG demand begins to price it out as a petrochemical feedstock.

 

Japanese utilities boosted LNG and oil use in power sharply as nuclear power utilization fell to only 41% in May. Fuel oil consumption increased by 50% yoy and direct crude use was up 126%. Kansai Electric Power is the third power company to warn of shortages and ask consumers to voluntarily cut power consumption.

Analysis:

After a pause in inventory build-up immediately following the Tohoku earthquake, oil consumption in power and purchases are again on the rise. Western Japan is also being impacted as nuclear plants that move into maintenance are facing delayed returns.