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Sour is the new sweet: OPEC’s view of oil quality dilemma n Reuters, London The US shale oil boom is turning global crude pricing on its head with the historical notion that light grades shall be priced at a premium to heavy ones quickly disappearing, according to predictions from producer group OPEC. The trend will have big implications for global oil flows, reducing revenues of light-oil-producing nations such as Nigeria and refiners geared toward heavy crude processing, OPEC said in a draft long-term report, a copy of which was seen by Reuters. Global oil prices have plunged in the past year due to a global glut, which arose from a steep increase in predominantly light US oil production and a subsequent decision by OPEC to defend market share by not cutting its output. OPEC produces a third of global crude, which is a mixture of light and heavy. “This supply glut, primarily of light sweet crudes, needs to ease sizably before the oil market steadies. Low oil prices are expected to force some of the costly light sweet crude oil to idle, but the displaced African light sweet crude is also forced to find an alternative market,” OPEC said. This could be a challenge if oil demand growth in Asia and Europe were to stay fragile, the cartel said. The pressure on sour crudes is not as intense due to tightness, particularly in Europe, as a result of sanctions, war, diversions and other geopolitical issues, OPEC said. “The war in Syria and the sanctions on Iranian exports to the West have limited availability of sour crudes to Europe for almost three years, causing the value of regional sour crudes to be oddly higher or at small discounts in relation to the sweet crudes,” the report said. It said turbulence in Iraqi production and ex-

Pump Jacks are seen at sunrise near Bakersfield, California ports from the country’s north also contributed to the tightness in sour grades, as did Russia’s decision to divert some of its exports to the Asia-Pacific at the expense of European markets. More pressure on light sweet crudes is also coming from the fact that most new, sophisticated refining capacities around the world have been designed to process heavy crudes on expectations that light oil would remain scarce. As a result, most refiners were unable to take advantage of cheaper-than-expected light grades due to limited light conversion refining capacity, particularly in the United

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States, the OPEC report said. “It is also difficult to justify altering the configuration of deep conversion refineries after the huge investments that were put into their upgrading prior to the tight oil boom, when the sweet/sour spread was wide enough to justify building such heavy conversion units,” it said. It added that shale gas developments in North America were poised to bring vast quantities of low-priced ethane, which will increasingly displace naphtha and gasoil from global markets. l

Reuters poll - OPEC supply, resurgent shale seen keeping oil prices weak n Reuters Oil prices are likely to stay relatively weak for the rest of this year due ample supply from traditional Middle East producers and a resurgence of US shale production, a Reuters survey forecast on Friday. Reuters monthly survey of 28 analysts predicted the global oil benchmark North Sea Brent crude would average $61.60 a barrel in 2015, close to current levels. So far this year Brent has averaged close to $58 a barrel, down from almost $100 in 2014. The Organization of the Petroleum Exporting Countries (OPEC) is likely to decide at its meeting in Vienna next week to keep its joint production target unchanged at 30 million barrels per day (bpd) but maintain output above that level, analysts said. “That should keep a lid on prices,” Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt, said. “The OPEC meeting will confirm the strategy of protecting its market share.” Frank Klumpp, oil analyst at LBBW, said oil prices were unlikely to rise much this year, largely due to a “probable United States shale comeback”. Goldman Sachs, one of the bigger players in commodity markets, argues shale oil producers, benefiting from lower costs, will ramp up drilling activity if the price of US oil stays near $60 a barrel. Twelve of the 25 analysts who contributed to both the April and May Reuters polls kept their 2015 average Brent price forecasts unchanged, while an equal number raised their forecasts. Intesa Sanpaolo analyst Daniela Corsini predicted a downward price correction over the next few weeks, with Brent dropping to around $60 a barrel and WTI at $55, fuelled by a return soon in Iranian supply and a recovery in US production. l

Emerging market capital flows to hit lowest level since 2009 n Reuters, Washington Capital flows to emerging economies are projected to fall to $981bn this year, their lowest level since 2009, from $1.05tn in 2014, due to disappointing economic growth, a drag from a potential US interest rate rise and a drop in investment in Russia, the Institute of International Finance said on Thursday. Foreign direct investment inflows are forecast to fall to $529bn from $586bn, largely on the back of declining investment in Russia and China, the body which represents nearly 500 financial institutions said. At the same time, outward investment by China this year is expected to rise $38bn to $540bn. Reserve accumulation by emerging economies is expected to slow to $74bn from $110bn in 2014 and an average $600bn in 2004-13. “Thanks to China, emerging markets on aggregate remain net exporters of capital,” the report said. Capital inflows to Russia have been hit hard by the conflict in Ukraine, the IIF said. Foreign capital outflows rose to $31bn in the first quarter from $24bn per quarter in the second half of 2014.

A clerk counts 100 Chinese yuan banknotes at a branch of China Merchants Bank in Hefei Rising concerns over the Turkish central bank’s ability to resist calls from the government to ease policy hit flows as well. Portfolio flows are a major source of finance for Turkey. Under a relatively benign scenario in which the US Federal Reserve starts to hike rates in Septem-

ber on the back of a steadily improving economy, the institute forecast a rise in inflows to $1.16tn in 2016. The biggest risk to this outlook would be if the US labour market tightened, leading to wage pressures and triggering a more rapid pace of Fed tight-

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ening that would result in a “super taper tantrum”. Emerging economies with large current account deficits - South Africa, Brazil and Turkey - are the most vulnerable to shocks, the IIF said. India, which has reduced its current account deficit, is now less vulnerable than it was in 2013. l

31 May, 2015  
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