The world seems in for a tectonic shift in direction. With the election of Donald Trump as the 45th president, the way the United States thinks and acts could change drastically.
Two major unrelated developments could be interesting to keep an eye on.
In the Trump era, Moscow, the world’s largest crude producer, is getting close to Washington. A new era of bonhomie is visible. If Trump’s pronouncements during the campaign are to be believed, all of a sudden, from an adversary with competing goals and objectives, Russia and the United States are about to begin an era of friendship, coordination, and cooperation.
And already the manifestations of this newfound friendship are in play. Almost the first telephone conversation that Donald Trump had with any global leader after the elections, was with the Russian president Vladimir Putin.
As per press reports, the conversation between the two was warm with both the leaders agreeing that currently, the US-Russian relations were “absolutely unsatisfactory.” That their two countries would now begin a new dialogue based on “equality, mutual respect, and non-interference in the other’s internal affairs”. They would stay in touch and meet soon, the Kremlin later reported. This was significantly different – in more than one ways.
Could this have ramifications for the energy world too?
Russia is already the world’s largest crude producer. In October, its crude output reached a post-Soviet high of 11.2 million barrels per day. In tons, this was 47.386 million tons – up from 45.483 million tons in September.
And Russia is endeavoring to give a boost to its output further. It expects a rise in oil output in 2017 to 548 million tons, due to new fields coming on-stream. Analysts quoted by Reuters feel that Russia has the potential for growth to 2019 when an output peak of 570-575 million tons could be reached – thanks to investments made before sanctions introduced by the West against Moscow for its role in the Ukrainian crisis in 2014.
In recent weeks, Russia›s No.2 oil producer, Lukoil has launched the Filanovsky offshore oil field in the Caspian Sea, the second major oil field opened by Russia in a week and the fourth this year. Russia would definitely be looking for markets for this additional output. Trump elections seem a God-gifted opportunity.
And while Washington seems to be forging closer, political and economic ties with Moscow, the president-elect seemed to be twisting the arms of Gulf Arab allies, by underlining he wanted to stop buying oil from Arab countries unless they commit ground troops to combat Islamic State or reimbursed the US for its efforts.
During the course of the long election campaign, Trump vowed to secure and strive for the US energy independence from “our foes and the oil cartels,” targeting a “complete American energy independence.”
Could these pronouncements impact the crude buying pattern of the United States – the world’s largest consumer of crude oil? Is it possible, that Trump Administration could start buying more crude from Russia – at the cost of its Gulf Arab allies?
Riyadh is cognizant of the challenges. Defending continued Saudi crude sales to the US, Energy Minister Khalid Al-Falih said in an interview, “at his heart President-elect Trump will see the benefits (of Saudi oil imports) and I think the oil industry will also be advising him accordingly that blocking trade in any product is not healthy.”
Falih added “the US is sort of the flag-bearer for capitalism and free markets,” and that “the US continues to be a very important part of a global industry that is interconnected, that is dealing with a fungible commodity which is crude oil. So having equalization through free trade is very healthy for oil,” he said.
Falih also reminded the president-elect that the US “benefits more than anybody else from global free trade,” adding “energy is the lifeblood of the global economy”.
Saudi Arabia is already the largest Middle Eastern oil supplier to the US with an 11% market share and has also invested heavily in US downstream assets (refineries) to help lock in that supply. Around 31% of all US oil imports are from OPEC members.
Twenty years ago Saudi Arabia was the top supplier of oil to the US market, but they lost that spot to Canada over a decade ago. Still, Riyadh is the second-largest source of US crude oil imports, supplying 1.1 million bpd in 2015.
In contrast, Russian crude exports to the United States are hardly significant. As per the EIA, the US crude imports from Russia in 2015 was only 38,000 bpd. In 2014 it was even below – 18,000 bpd.
Is this all about to change?
Already Riyadh and Moscow are battling it out in China. As the competition to grab market share intensified, Russia edged out Saudi Arabia from the top spot in China, selling more oil to China. According to statistics from China’s General Administration of Customs, Russian oil exports to China increased nearly 42% to over 22 million tons from January to May. For the same period, Saudi oil exports to China totaled 21.8 million tons.
At the beginning of the decade, Saudi market share of the Chinese market was around 20%, while Russian crude exports were below 7%. Saudi sales to China – doubled to more than 1 million bpd in 2011 from 500,000 bpd in 2007 – but has barely grown since. Russian oil exports to China over the past five years has doubled – up by 500,000 bpd
Russia has been exploiting a tactical advantage over Saudi Arabia in the Chinese market. Moscow uses the Russian-Chinese oil pipelines that are already in place, to ship oil to the Chinese markets, whereas, the voyage for Saudi crude to China (a distance of around 6500 nautical miles) can take three weeks or more.
Bloomberg said that the energy relationship between the two neighbors has continued to deepen since Russia started sending oil supplies to China via the ESPO pipeline in 2011. Already there are talks of laying down a second pipeline between the two countries, to carry additional crude.
In order to overcome this handicap and increase crude sales to China, Saudi Arabia has lately been offering more cargoes at spot prices with more lenient payment terms.
Saudi Aramco is also expanding its oil storage capacity in Okinawa in southern Japan by nearly a third. In April this year, Aramco sold its first cargo of Arabian Heavy crude to a Chinese independent refiner from Okinawa in a trial spot shipment.
Saudi Arabia is also looking at setting up additional storage in China, with the two countries signing a memorandum of understanding to consider the matter earlier this year.
And the battle rages.
Could we expect the same in the US markets too? This is yet to be seen. There are no hints as yet to this effect. But things continue to be fluid in Washington. And in the wake of Trump presidency, nothing could be ruled out.