Latin America is a major end market for petroleum products and in addition, many of its emerging economies have become big players in the upstream sector of the global oil market.
Recent economic struggles, amid a deteriorated crude pricing environment, have put pressure on Venezuela’s oil production; however, these output losses have not significantly reduced crude exports from the country until recently, McQuilling Services reported in an industry note.
Venezuelan crude production has declined by around 300,000 barrels per day since 2014, while crude exports rose and fell over this period settling at just 29,000 barrels per day higher, compared to two years earlier.
Through September 2016, exports remained relatively flat, compared to a year earlier, supported by a reduction in domestic refinery runs. However, from October to November McQuilling saw a notable decline in volumes, pressuring tonne/miles out of this region.
Overall, crude exports through November 2016 averaged 351,000 tonnes per month lower year-on-year, a decline of about 4.3%, compared to a 10.4% decline in crude production.
Amid both lower cargo volumes and relatively flat mileage travelled, tonne/mile demand generated by Venezuelan loadings declined by 3.8% from 2015, but remained slightly above 2014 levels. The main driver behind this decline was a large reduction in flows to China, which averaged 2 mill tonnes monthly through September 2016 and fell by 37% over the following two months.
Aside from Venezuela, the Caribbean region includes several key exporting countries like Colombia, which also generated lower tonne/mile demand last year. With the modernisation of the Cartagena refinery, Colombian refinery runs increased by about 85,000 barrels per day year-on-year in 2016. This contributed to a drop in average monthly exports from 4.5 mill tonnes to 4 mill tonnes in 2016.
A notably absent trading partner last year was India, leading to a reduction in tonne/mile demand as these flows travelled to the US instead. As a response to lower Colombian volumes, India expanded trade with Mexico (as well as Middle East producers).
While Colombian crude has been largely erased from India’s refining mix, Mexican crude has been in demand. Mexican crude production has averaged over 100,000 barrels per day lower year-on-year through 2016, while refinery intake has declined by over 110,000 barrels per day. This resulted in 142,000 tonnes more export volumes per month throughout 2016, supporting a 13.8% boost in tonne/mile demand out of the country.
Higher mileage was observed, McQuilling said, due to increased trading with Eastern markets as Indian refiners imported 21% more crude from Mexico in 2016, while Japanese refiners took about 148,000 tonnes per month more year-on-year.
Growth in exports is not expected this year, as a lack of investment takes a toll on upstream operations and the balance of available crude for export declines by around 180,000 barrels per day year-on-year. Mexican crude production is forecast to decline by about 196,000 barrels per day year-on-year, while Colombian oil output is on track to fall by 50,000 barrels per day in 2017.
When combined with Venezuela, McQuilling forecast flat VLCC demand out of this region throughout this year. Despite the declining output, one area of support for demand may stem from the co-loading of Mexican crude and US crude for voyages to Eastern markets.
The most positive demand contributor to the VLCC sector in 2017 will be East Coast South America (ECSA), specifically Brazil. As Brazil’s economy emerges from contraction in 2017, the upstream oil and gas sector is expected to expand.
New FPSOs are on track to begin operation in Brazil and support 3.6 mill barrels per day of ECSA regional output in 2017 (JBC Energy). Brazilian production is forecast to increase by 182,000 barrels per day exceeding domestic demand from refiners and boosting exports to average 866,000 barrels per day.
Although exports declined slightly from 2015 to 2016, VLCCs enjoyed tonne/mile demand gains of 2.5% from longer-haul voyages to markets in the East, such as China Crude flows from Brazil (and Northern Argentina/Uruguay) to the Far East, India and Southeast Asia are all projected to be big gainers this year.
While this will support the VLCC sector, some pressure for smaller tankers may be seen, as Brazil’s exports to the US have been significantly reduced in recent years.
To summarise, VLCC tonne/mile demand out of the Caribbean region is forecast to remain flat through 2017, pressured by a decline in flows to the Far East. Stable demand growth of 7% is expected from East Coast South America, due to a rising crude export market in Brazil, as the country ramps up production and economic activity.