OPEC+ has recently surprised the market by announcing a cut in oil production. This move is setting the stage for other oil producers to compete for Asia’s oil demand. Since 2017, OPEC+ member states have been prioritizing oil flows to Asia at the expense of countries like the US. Last year, 70% of oil from the group went to Asian countries, including China and India, up from 61% in 2017. Meanwhile, the share bound to the US has decreased to 6% from 10%, according to data from market intelligence firm Kpler SAS.
However, the US has also increased its oil production in recent years, mainly through shale deposits. American refineries have also enhanced their ability to process lighter crude grades typically pumped from places like the Permian and Eagle Ford. Currently, 63% of the oil processed by US refiners is produced domestically, up from 41% a decade ago. Refiners in Asia will also be able to process these lighter oil grades, which could put American fuel makers in direct competition with buyers from Asia.
Despite the US reducing its reliance on OPEC+ oil, the country still imports close to 580,000 barrels daily from the group, primarily medium and heavy-grade crudes. The latest production cut by OPEC+ could make it even harder for the US to source these barrels. This is likely to start impacting deliveries arriving in the US in July, during the height of the summer driving season, giving American buyers until then to start searching for alternatives.
The move by OPEC+ is significant and could have major implications for the oil market. With Asia being the primary destination for OPEC+ oil, other oil-producing countries will undoubtedly be looking to take advantage of any disruption caused by the production cut. One country that could benefit from this disruption is the US.
The US has increased its oil production significantly in recent years, and American oil exporters could see the OPEC+ cut as an opportunity to grab a larger share of the Asian market. With US refineries producing more light crude grades, buyers in Asia may find it more attractive to purchase from the US than from OPEC+ countries.
As the US continues to rely on substantial quantities of medium and heavy crude oils from OPEC+, the potential shortage of such oils resulting from production cuts may force American purchasers to look elsewhere for sources. This may result in an uptick in the demand for oil from non-OPEC+ member countries such as Russia.
The United States ramping up its oil exports to Asia is not without peril. One of the foremost risks is the stiff competition from other countries that produce oil. In recent years, nations such as Russia and Saudi Arabia have expanded their oil exports to Asia and could redouble their efforts in light of the production cuts enacted by OPEC+.t.
The transportation of oil to Asia poses a formidable hurdle for the United States. Although the country possesses ample capacity to export copious quantities of oil, the expenditure of conveying it to Asia is markedly exorbitant. This factor could potentially render American oil comparatively less competitive against the offerings of neighboring producers such as Russia and Saudi Arabia.
The decision made by OPEC+ to reduce oil production unexpectedly has presented an opening for other oil-producing nations to compete for market share in Asia. The surge in oil production by the US over the last few years puts them in a position to reap benefits from this situation, but they will be met with rivalry from other oil-producing nations. The transportation cost of shipping oil to Asia may impede the competitiveness of American oil compared to oil produced closer to the Asian market. Furthermore, the cut in oil production by OPEC+ may trigger a shortage of medium and heavy crude grades, causing American buyers to explore alternative sources.
