North Korea’s potential to disrupt oil demand cannot be ignored
NORTH Korea is not at the center of the oil market -- the country produces almost no crude oil, has two barely functioning refineries and is believed to import a tiny volume of around 15,000 b/d of crude oil and some refined products from China. But oil market watchers cannot ignore Pyongyang’s increasingly aggressive stance for the impact it could have on oil demand - a crucial variable in rebalancing the markets.
South Korea has already raised the alert, saying that the impact of North Korea’s sixth nuclear test could spread to the real economy, which could dent oil demand. Additionally, an escalation of tensions between the United States and China on this issue could also have trade and economic repercussions.
These risks come at a time when the oversupply of oil was just beginning to balance out against demand. Before the threat of North Korea emerged, growing oil inventories and demand had offered a glimmer of hope in rebalancing the oil market, the International Energy Agency (IEA) said in its latest monthly oil report released in August.
The IEA said that though OECD (Organisation for Economic Co-operation and Development) oil stocks have come off and are now below 2016 levels, they remain 219 million barrels above the five-year average. Even if stocks fall by half a million barrels per day (b/d), they will still be about 60 million barrels above the five-year average by March 2018, according to the Paris-based agency.
The IEA forecasts demand growth of 1.5 million b/d in 2017 and still relatively strong demand growth of 1.4 million b/d next year.
Now, the fragile recovery in demand is under threat. In reaction to Pyongyang’s claim that it tested a hydrogen bomb, US President Donald Trump tweeted that the US was considering “stopping all trade with any country doing business with North Korea.”
This was clearly directed at China, which is believed to have maintained its oil ties with North Korea.
Japan has been pushing for an oil embargo as an additional UN Security Council sanction against North Korea, following the regime’s ballistic missile launch over Japan on August 29. But any UN Security Council resolution on tightening sanctions against North Korea would require tacit consent from China, which has veto power as a permanent UN Security Council member.
Market sources have told us that China supplies small volumes of crude from its Daqing block to North Korea’s Ponghwa refinery - through a pipeline. Ponghwa has a capacity to handle 1.5 million tonnes of oil per year (30,000 b/d).
According to China’s official customs data, the last crude exports to North Korea were in December 2013 at 92,223 tonnes with a total of 578,002 mt (4.24 million barrels) exported to the country that year. After that, no crude exports to North Korea are recorded. But market sources in North Asia say North Korea currently takes about 6 million barrels/year of Chinese crude.
Meanwhile, supply is still growing. OPEC continues to grapple with oversupply owing to a ramp up of production in Nigeria and Libya - the two OPEC members exempt from the oil cut deal agreed by OPEC and nonOPEC producers in late 2016.
According to the latest Platts survey, OPEC produced 32.82 million b/d in July, its highest level so far this year. Libya’s oil output averaged 990,000 b/d in July, up 180,000 b/d from June, though the country lost around 360,000 b/d of output by mid-August due to the closure of three fields.
Nigeria produced 1.81 million b/d in July, up 30,000 b/d from June.
Oversupply has kept a lid on oil prices which have hovered in a tight range of US$50-52 per barrel for Brent crude and US$47-49 per barrel for West Texas Intermediate crude.
But strong signs are emerging that the 1.8 million b/d production cut agreement which took effect on January 1 this year and was due to end in March 2017 will be extended until June.
Saudi Arabia and Russia are keen on the extension to demonstrate their commitment to market management and dampen fears that the producers will return to a market-share battle as soon as the deal expires. Informal discussions have begun around the deal and Iran and Iraq have pledged their support.
Meanwhile, Libya and Nigeria have been invited to attend the next OPEC/ non-OPEC monitoring committee meeting in Vienna on September 22 to discuss their their production outlook. It was not clear if the two countries will be asked to join the cut agreement.
But with stocks still stubbornly high and non-OPEC production growth showing no signs of abating - according to the IEA, non-OPEC output is expected to grow by 1.4 million b/d in 2018 and that could wipe out gains from a growth in demand - it remains to be seen if simply an extension will be enough or will the producer group have to deepen the production cuts to speed up rebalancing.