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Bad News For Crude Oil Prices: Persian Gulf Refineries

By Ellen R. Wald, Ph.D.CommoditiesAug 04, 2015 11:57PM ET
www.investing.com/analysis/bad-news-for-crude-oil-prices:-persian-gulf-refineries-260528
Bad News For Crude Oil Prices: Persian Gulf Refineries
By Ellen R. Wald, Ph.D.   |  Aug 04, 2015 11:57PM ET
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The low oil prices engineered by OPEC in the last year are feeding several new Saudi refineries. The oil producing nations of the Persian Gulf have decided to produce petro products, not just crude oil, and this means serious profits for Saudi Aramco and its partners. It also indicates continued low crude oil prices, a negative sign for the U.S. shale industry – like EOG Resources (NYSE:EOG), Halcon Resources (NYSE:HK), and Oasis Petroleum (NYSE:OAS) – and other U.S. crude producers like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Hess (NYSE:HES) and Continental Resources (NYSE:CLR).

Traditionally, crude oil was not refined in the Middle East, but shipped off in tankers or transported by pipeline to refineries in North America and Western Europe. Only a fraction of local crude oil was refined at the Aramco refinery in Ras Tanura and the British Petroleum refinery at Abadan in Iran, but refinery expansion failed to keep pace with growing crude oil exports. The American and European oil companies that originally ran Persian Gulf oil operations did not invest heavily in refining in the Gulf region. Construction costs were extreme, particularly in undeveloped desert regions like Saudi Arabia, skilled workers hard to come by, and political turmoil was constant. Moreover, the United States had a slew of new refineries left over from World War II, and the Marshall Plan had funded new oil refineries throughout Western Europe so there was no need for additional refining capacity at the time.

Now the tables have been turned and Saudi Arabia, Iran, Kuwait, Bahrain, and the UAE own the oil operations started by Americans and Europeans in their respective countries. Downstream growth has been a priority for Saudi Aramco since 1988, when it first acquired shares in the Motiva Refinery in Texas. Saudi Aramco has held stakes in refineries in South Korea, China, Greece, the Philippines, and India. With ample space in Saudi Arabia and experienced personnel, opening domestic refineries was just the next step in Saudi Aramco’s vision of energy diversification and expansion.

The Jubail refinery (a joint operation with Total (NYSE:TOT)) opened in 2013 and the Yanbu refinery (a joint operation with Sinopec (NYSE:SHI) opened in 2014. Each currently processes 400,000 bpd. A third 400,000 bpd refinery in Jazan is currently under construction. Both Kuwait and the UAE are constructing refineries that will begin processing nearly 1 million barrels of oil a day by 2020. Like all major projects, these refineries have experienced setbacks and major delays – but these delays are insignificant in comparison to what is happening in the United States, where no one has built a new refinery since the 1970s.

The impressive growth in Persian Gulf refining means that whether oil prices are high or low, Saudi Aramco, Kuwait Petroleum Co., and Abu Dhabi National Oil Company will be making money. At low crude prices—meaning high production rates—these countries can both flood the global crude oil market and refine domestically – capturing market share on both fronts.

Moreover, the Gulf countries can sell the refined oil—petroleum products—at a relatively higher price than the crude, because (1) the refining industry has not caught up to the crude industry growth and similarly increased its capacity, and (2) America’s own political decisions have led to a glut of crude and a related need for new refining. Our crude oil export ban, coupled with our stagnant refining capacity have contributed to the glut of crude and the concurrent short supply of refining capacity. This means it is that much more profitable for the Gulf countries to export refined petro-products than to simply export crude.

Low oil prices came at exactly the right time for Saudi Arabia’s impressive new refining capacity. That should be no surprise, given Saudi Arabia’s influence on OPEC, and OPEC’s decision to keep pumping last fall. The question investors need to consider is whether OPEC will continue the cheap crude policy in part to continue supplying that crude to refineries owned by OPEC nations.

Bad News For Crude Oil Prices: Persian Gulf Refineries
 

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Bad News For Crude Oil Prices: Persian Gulf Refineries

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Aug 06, 2015 9:29AM ET
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I wonder if the author has looked at the export numbers of Saudi Arabia since their decision to keep pumping at record levels. The Sudis are losing money on every barrel they produce. So how exactly is this sustainable? And how would low oil prices help refiners if the refined product does not cover the cost of production?
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Anthony Reid
Anthony Reid Aug 06, 2015 9:29AM ET
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According to MarketWatch; OPEC data it costs the Saudi's $2 a brl to get it out of the ground so not sure how they are "losing money on every barrel they produce". In the US the average production cost is just $30, the state says. Another 27 rigs are around $29,data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is $42 — to make a 10% return for rig owners. Data suggest that So if the price of crude drops below $40 a barrel, some producers in the US may decide to stop pumping.
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Brad Smith
Brad Smith Aug 05, 2015 9:11AM ET
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"Our crude oil export ban, coupled with our stagnant refining capacity have contributed to the glut of crude and the concurrent short supply of refining capacity. This means it is that much more profitable for the Gulf countries to export refined petro-products than to simply export crude."..From what I'm hearing, it sounds like there is a great opportunity for our own refiners to grow here if we are that short of refining capacity. I'd imagine there shouldn't be any cost issues holding our refiners back when compared to the saudi refiners at this point. It may take some time to catch up though.
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Aug 05, 2015 9:11AM ET
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It is interesting that the Saudis have basically started a war with the USA. An oil war. Financed by their government, this is a direct attack on the U.S. Shale industry. With a little backbone in our government (hah!) we could bury the Saudis via our own subsidies. The USA could also convert our refineries so that they accept our own light crude rather than the heavy crude they currently accept. If the USA had any ******at all, it could literally cripple the Saudi economy. But that won't happen because they are our "dear friends". Right?
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Jabberwocky Jefferies
Jabberwocky Jefferies Aug 05, 2015 9:11AM ET
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"It is interesting that the Saudis have basically started a war with the USA. An oil war. Financed by their government, this is a direct attack on the U.S. Shale industry.". . Forget that it's SA. Just call it country X. Now, the US is the new kid on the block, pumping millions more barrels per day than it was even 10 years ago. Is country X pumping millions more barrels per day than 10 years ago?. I think not.. Therefore if anyone is providing the supply shock, it's the US, not country X..
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BigEye Eye
BigEye Eye Aug 05, 2015 9:06AM ET
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thank you for information. otherwise by my opinion your conclussion about price of oil is wrong. The biggest losers will be refiners all around the world, because they won't be able to collect freely spread as are doing now.
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