North Korea’s po­ten­tial to dis­rupt oil de­mand can­not be ig­nored

The Myanmar Times - - Business | International - MRIGANKA JAIPURIYAR Mriganka Jaipuriyar is As­so­ciate Ed­i­to­rial Director, Asia & Mid­dle East En­ergy News & Anal­y­sis, at S&P Global Platts, S&P Global Platts, lead­ing in­de­pen­dent provider of in­for­ma­tion and bench­mark prices for the com­modi­ties and en­ergy m

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.

Py­ongyang threat

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.

More sup­ply

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.

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