Further Supply Coming To Dampen Oil Prices
(Bloomberg) -- The next big threat to oil prices isn’t from OPEC or Bakken shale. It’s Russian samovars, or teapots.
Simple refineries that process crude into fuel oil are scaling back,
because when oil prices slump, the government reduces the discount that
these refiners -- known as teapots to those in the industry -- get for
exporting fuel. They use less crude, freeing it up for sale abroad,
which in turn adds to the global glut.
Russia may increase oil exports by as much as 250,000 barrels a day this
year, according to James Henderson, a senior research fellow at the
Oxford Institute for Energy Studies who’s followed the country’s energy
industry for more than 20 years. That would equate to 5 percent growth
in shipments, the most in at least a decade.
“The pain Russia is feeling from low oil prices has made more crude
available for export,” Henderson said by phone March 18. “Quite a few of
Russia’s simple refineries could reduce their runs.”
Rising shipments from Russia, which ranks with Saudi Arabia and the U.S.
as the world’s biggest oil producers, would put more pressure on crude,
already down more than 50 percent from last year. Falling energy prices
and U.S. and European Union sanctions imposed last year in response to
the Ukraine crisis have pushed Russia to the brink of recession, damping
demand for refined fuel products in the country.
Rattling Teapots
Brent was up 74 cents to $55.17 a barrel at 3:26 p.m. in London. It slid
2.7 percent to $54.43 on Thursday. Crude loadings from Russian ports
are 9.5 percent higher in the first quarter year over year, according to
shipment schedules obtained by Bloomberg.
Teapot refineries processed as much as 800,000 barrels of crude a day
last year, Igor Dyomin, a spokesman for Russia’s state-run pipeline
operator, OAO Transneft, said by phone March 19. A teapot refinery is
one that produces mostly fuel oil rather than more premium fuels,
according to Dyomin.
Seven simple plants with a combined capacity of 1.2 million barrels a
day are most at risk in the current price environment, according to
Henderson.
Maintenance Cuts
There could be sporadic cuts to refining of 400,000 barrels a day during
the next few months’ maintenance season, with much of the unused oil
exported, putting more pressure on crude prices, according to JBC Energy
GmbH, a Vienna-based consulting company whose clients include OPEC.
The additional barrels would arrive as the Organization of Petroleum
Exporting Countries, whose 12 members produce about 40 percent of the
world’s oil, sticks to plans it announced in November to maintain its
own output in response to the global supply glut. The move has yet to
lead to a drop in production by the biggest non-OPEC countries.

When crude prices slide, so too does the size of Russian tax discounts
for exporting fuel oil that’s used by ships, power plants or further
processing. Refiners save about $25 a ton selling the product instead of
crude at current prices. The saving would be about $62 a ton if crude
was at its 2014 average of about $100 a barrel, according to data
compiled by Bloomberg.
Downstream Agenda
The possible growth in exports may be reversed because the refineries
hurt by the current duty system are trying to get it changed.
Igor Sechin, chief executive of OAO Rosneft, the world’s biggest
publicly-traded oil producer, told Russian President Vladimir Putin in
February that this year’s tax changes had changed the economics of
refining, and sought state financial support for a refinery project.
Russian crude exports averaged 4.84 million barrels a day last year, a
6.1 percent drop compared with 2013. The biggest annual increase in the
past decade was 3.6 percent in 2009.
Rosneft said in a January presentation that simple refineries that
produce a high percentage of fuel oil are only marginally profitable at
$85 a barrel and start losing money with Brent crude at $50.
“When oil prices were high, it was profitable to sell fuel oil abroad
and get a big tax discount,” Transneft’s Dyomin said. “We called it
‘spoiled crude’ because the product they produced was less valuable than
the oil they used to make it. Now, the tables have turned.”
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