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The economic diversification of OPEC MCs

OPEC Member Countries' economy indicators, including GDP growth and current account balance, continued to improve in 2018. The population of OPEC MCs increased by almost 11 million last year, with Nigeria, Iraq and Angola adding 5.3, 1, 0.52 million inhabitants, respectively, thus bringing the OPEC MCs' share of global population to 6.64 per cent (up from 6.57 per cent in 2017). Real GDP increased by around 0.2 per cent y-o-y in 2018, compared to the 0.5 per cent y-o-y in 2017. Consequently, the combined OPEC MCs GDP at current market prices increased by nearly $130 billion to $2.954 trillion. The current account balance of OPEC MCs also improved and settled at $200bn in 2018, up from $71bn in 2017. This improvement materialized as the value of exports spiked by +15.5 per cent y-o-y to more than $1.2tr in 2018, while the value of imports declined marginally y-o-y to $755bn.

OPEC MCs successfully continued to improve the diversification of their economies and be less dependent on petroleum export revenues. The share of OPEC MCs petroleum export revenues to GDP has decreased by around six percentage points over the last five years. Declines have been registered in all OPEC MCs, as local governments commissioned a number of initiatives and programmes to promote the development of high value-added non-oil industries, including manufacturing and services. The trend of diversification is also confirmed when analyzing the share of non-petroleum export revenues to GDP at comparable oil price levels (see Graph 2). Over the last four years (2015–18) this ratio has been between 78 per cent and 85 per cent, which is between 20 and 15 percentage points higher, as against the same ratio in years of comparable oil prices (2005, 2006, 2007, 2009).

Recent developments in oil supply

The year 2018 saw substantial global supply growth. Total oil liquids production increased significantly by 2.60 million barrels/day, outpacing oil demand growth by more than 1m b/d in 2018. The increase was once more driven by outstanding production gains in North America, particularly in the United States. In contrast, crude oil production from OPEC Member Countries, as well as from other non-OPEC countries showed declines.

In total, OPEC crude oil production showed a drop of around 400,000 b/d year-on-year. Among non-OPEC countries, the biggest production losses were observed for Mexico and Norway. Mexico continues its falling trend with 14 years of production deteriorations in a row, on the back of natural declines at mature fields, as well as investment cuts. Norway has managed to stabilize oil output in recent years, after continue declines for over a decade in the early 2000s. Yet, technical problems on some fields and unplanned shutdowns caused Norway's 2018 oil supply to decrease by over 100,000 b/d y-o-y.

Brazil was expected to increase its production in 2018 substantially, with a number of subsalt projects coming onstream during this year. However, project delays and maintenance shutdowns at some fields were the reasons that not even 2017 production levels could be maintained for crude production and the minor increase in total supply came only from biofuels production.

With regard to countries with increasing oil production in 2018, output expansions were clearly driven by North America, notably by the United States. Oil supply in the US increased by around 2.3m b/d in the year 2018, representing almost 80 per cent of total non-OPEC supply growth. About 1.6m b/d of the total US supply surge came from crude oil (mainly from tight formation) and 700,000 b/d from non-crude elements (especially of NGLs), marking a growth of 17 per cent and 13 per cent, respectively (see Graph 1).

From Graph 1, one can also observe three periods of production trends in the US within the last 40 years. Up to 1985, production from both crude and non-crude elements was rather flat, slightly increasing (indicated as period ① in the graph). Between 1985 and 2008 (period ②), output of non-crude elements grew, partly offsetting the losses in crude production. Thereafter and indicated as period ③, all elements of supply surged.

Furthermore, it should be noted that the high output growth did not go together with comparable increases in rig counts (see Graph 2). Although rig counts have recovered from the lows of the year 2016, they are still far below the levels overserved in the years before. This development might be due to improved drilling and well productivity, as well as to production coming from wells which were drilled earlier but not completed.

Finally, the second main contributor to supply growth in 2018 was Canada, experiencing oil output gains of 370,000 b/d, with the bulk coming from Alberta oil sands.

Major Downstream Developments

The downstream industry enjoyed yet another year of upbeat market indicators in 2018, as oil demand growth remained solid in 2018 and supported further downstream operations across the globe.

World oil demand has grown by roughly 1.4m b/d, or 1.5 per cent y-o-y to reach 98.7m b/d in 2018, however, this was lower than the annual growth levels seen after 2015. Higher oil requirements during 2018 came in line with solid global economic growth in main oil consuming countries within the OECD and non-OECD regions. The bulk of additional OECD oil demand originated mainly in North America and particularly the US, while non-OECD Asia and Pacific, notably China and India, were the key contributors of non-OECD oil demand growth.

OECD oil demand grew for the fourth consecutive year during 2018. During the time frame 2015–18, OECD oil demand increased by a remarkable 2.0m b/d in total and reversed its downward trend during previous years. The 2015–18 cumulative OECD oil demand growth occurred almost solely in North America and Europe.

Refining margins varied across the regions. While US refiners enjoyed an y-o-y uptick in margin, European and Asian refiners saw margins decreasing, but remained at healthy levels. The WTI refining margin increased by $3.97/b y-o-y in 2018 to $14.53/b, amid oil demand growth in the country. Moreover, US refiners further grasped the opportunity to deliver oil products to neighbouring South American countries, which continued to be short on several products. In Europe, the Brent refining margin decreased from $7.47/b in 2017 to $5.49/b in 2018, amid rising oil product imports from Russia.

Refinery intake moved up by nearly 1.4m b/d y-o-y in 2018, with Asian refiners (+870,000 b/d y-o-y) in the driving seat of this growth, closely followed by their North American (+420,000 b/d y-o-y) counterparts. In Western Europe, refinery intake declined by 70,000 b/d y-o-y, while in Eastern Europe and Eurasia it increased by 250,000 b/d, driven by additions from Russia (+130,000 b/d y-o-y) and Kazakhstan (+70,000 b/d y-o-y).

Refining capacity increased by around 900,000 bc/d y-o-y over 2018, with nearly 2/3 of these additions coming online in the second half of the year. In Asia, several Chinese refiners expanded their refining capacities. Petro China's Daqing refinery in Huabei saw its capacity increasing by 100,000 b/d in May, while CNPC's Wuhan refinery added 100,000 b/d to its capacity in October. A total of 240,000 b/d of condensate splitting capacity materialized in the Islamic Republic of Iran, reflecting the country's growing profile in the petrochemical industry. Refining capacity in the FSU grew by 170,000 b/d y-o-y in 2018, as Russia and Kazakhstan added 90,000 b/d and 70,000 b/d y-o-y, respectively.

US as one of the top ten crude oil exporting countries in 2018

For decades the US Energy Policy and Conservation Act enacted regulations constrained US crude oil from being exported outside national territories. However, in December 2015, Congress lifted the ban and volumes of crude oil exports skyrocketed significantly thereafter. The overall consequence was that in 2018, the US has evolved as the seventh largest crude oil exporter.

  Table 1.: Top 10 exporting countries in 2018  
Rank
Country
tb/d
1 Saudi Arabia 7,242.9
2 Russia 5,069.1
3 Iraq 3,848.0
4 Canada 3,150.2
5 UAE 2,465.7
6 Kuwait 2,074.5
7 United States 2,002.4
8 Nigeria 1,972.8
9 IR Iran 1,849.6
10 Kazakhstan 1,436.7

From 2000–12, US crude oil export grew on average by 2,500 b/d yearly. In the subsequent three years, from 2013–15, export volumes rose on average by 165,000 b/d year-on-year, and, thereafter, volumes increased drastically, on average, by more than 705,000 b/d annually. From a regional perspective, historically, Canada used to be the main export destination of US crude oil. However, after the lifting of the ban, Western Europe and particularly Asia have become top destinations of US crude oil exports, as indicated in Graph 1. Italy and the Netherlands are the main purchasers of US crude oil in Western Europe. In Asia, China, India, South Korea and Taiwan account for the biggest shares. The overall consequence is that the US has become one of the largest crude oil exporting economies on a global scale.

Middle Eastern countries' exports of petroleum products to Asia

Generally, refining capacities of Middle Eastern countries' oil producing economies are on a rising trend not only to meet the growing domestic demand for petroleum products, but also to supply the rest of the world. This implies that the global dependency, particularly in Asia, on main petroleum products of this region, chiefly the Gulf, becomes more important. Within this context it is important to bear in mind that any importer of oil products is not only confronted with the dominating volatile product prices but also with the cost-dynamics of the international oil tanker industry.

Commonly, the daily cost of shipping is measured in Worldscale (WSC) points, which is the percentage value of the annually published flat rate (eg shipping cost in $/t terms) that a charterer would pay to transfer a liquid cargo on a tanker between any two ports globally. The tanker market can be very volatile and the announced WSC rates can vary significantly depending on the supply-demand structure of available cargoes.

Descriptive statistics show that within the period of 2009–18, the WSC points averaged 114 per cent annually, with a standard deviation and coefficient of variation of 11.8 per cent or 10.4 per cent, respectively. Based on the corresponding standard deviations, this implies that over the years the spot clean tanker market (as measured in WSC points) was less volatile than the global prices in the spot market for major petroleum products.

The OPEC Reference Basket Price

The regular ORB price announcement, as assessed and published by the OPEC Secretariat, attracts the attention of an immense number of national, as well as international institutions, newspapers and other relevant news agencies. Its importance within the global economy, and the oil industry in particular, cannot be neglected. Although the ORB as such is not traded in the physical crude oil market, it serves as a reference point of OPEC MCs' average crude oil export price. More precisely, it provides an indication of how much OPEC MCs charge for one barrel of crude oil. Hence, the complex price assessment methodology of the ORB primarily aims at serving as a reliable proxy properly reflecting the dynamics of the crude oil market within OPEC MCs.

Together with ORB quotations, the international oil community regularly observes the price developments of major benchmark crudes for three main regions; Brent, Dubai and WTI for Europe, Asia and the US, respectively. Comparing the dynamics of these three crude streams with the price evolution of the ORB, it can be clearly observed that all major benchmark crudes follow the same pattern, as depicted in Graph 1 below.

Moreover, when looking at the spreads between the ORB and corresponding benchmark crudes, it is plain to see that the ORB converges more with the Asian benchmark crude Dubai, as presented in Graph 2 below. This empirical observation is in line with the actuality of OPEC MCs' increasing concentration on the Asian market, as more crude is exported to this destination.

Taxonomy of composite barrels price structures across OECD countries

Approximately half of the composite price of every barrel in the OECD countries in 2018 was collected by the local government in the form of tax. The CIF crude price and the industry margin comprised the remaining half. In the period 2011–14, when oil prices hovered at $100/barrel, the tax component comprised around 45 per cent, whereas the CIF crude price and the industry margin accounted for approximately 41 per cent and 14 per cent, respectively. The oil price decline of 2014 resulted in an alteration of these shares' constellation: the tax component and industry margin components increased, whilst the CIF crude price pillar declined by more than ten percentage points. The rationale behind this alteration lies in the taxation system in many OECD countries. Government budgets in many OECD countries are dependent on proceeds from taxes on oil products. These accounts (and hence public spending) would have incurred deficits (spending assumed constant) when oil prices sharply decreased, had the relative share of the tax component in the composite barrel price not increased. Furthermore, the oil product rationale is not uniform across all OECD countries, for a mixture of reasons, including socio-economic, geographical and political considerations. For example, the US government puts less weight on taxes (thus the composite barrel price is lower compared with other OECD countries, while the relative weight of the industry margin and CIF crude prices are higher), whereas in Germany the tax component comprises more than 50 per cent of the composite barrel's price.

Natural gas reserves and production: An overview of historical patterns

World proven natural gas reserves rose for the fifth consecutive year during 2018 and reached a new all-time peak. Long-term historical trends show different patterns between regions. The regional share of proven natural gas resources (compared with total world) were mostly on a rising trend between 1975–2018 in the Middle East and Africa, moving from 33 per cent at the end of 1975 to 47 per cent at the end of 2018. Shares of reserves in the Middle East and Africa grew on average around 0.3 per cent per year, with OPEC Member Countries (MCs) contributing substantially to this growth. Shares of proven natural gas resources were on a declining historical pattern in Europe and Eurasia, as well as America, while they moved on a rather flat trajectory in Asia and Pacific (Graph 1). The Middle East and Africa, including OPEC MCs, increased their historical shares in (marketed) natural gas production, from a mere three per cent in 1975 to an average of 24 per cent during 2018 — the contribution of OPEC MCs was substantial, similar to increases in natural gas reserves. Increasing historical trends in regional production shares could also be registered in Asia Pacific, while relative weights declined historically in America, as well as Europe and Eurasia (Graph 2).

Based on the above trends for regional proven reserves and natural gas production, historical reserves-toproduction (R/P) ratios also vary between regions. Calculated R/Ps for all regions, except for America, as well as Europe and Eurasia, are on historical declining trends. The steepest decline rates are for the Middle East and Africa. In terms of level, the Middle East and Africa R/P ratios follow a substantially higher trajectory than in other regions. The OPEC R/P ratio follows a parallel declining pattern to the Middle East and Africa, with a similarly higher level. R/Ps for Europe and Eurasia, as well as for America follow slightly increasing trends. The distribution of regional R/Ps unsurprisingly implies the course of the total world R/P, with peak during 2001 (Graph 3). The overall satisfactory fit of this modelling exercise is additionally supported by a high coefficient of determination, in addition to small in absolute value and without pattern model residuals.