Oil flows direction change after OPEC deal

The aim of OPEC to end the global oversupply of crude oil has stopped the two-year decline in raw material prices. The attention is now turning to how the surprising decision of the group to cut yields will transform international trade flows of the most important raw material in the world. The preliminary reports indicate that the priority for suppliers from the Middle East will be Asia, which will make competitors from Africa and America to keep their cargo in the Atlantic region. Saudi Arabia said that initially will focus most of its streams to rapidly growing Asia, while will withdraw from oversupplied western regions and probably Kuwait will do the same.

Understanding how and where oil flows is important for almost all the supply chain. The traders of crude oil need such information and to take advantage of regional price differences. The tanker owners depend on the loads to be transported long distances, and many refineries work most efficiently with a specific type of crude oil.

If the producers of the Middle East really are struggling to maintain their market share in Asia, the more crude oil produced in West Africa, the North Sea, the Black Sea and the Mediterranean, can remain in the region.

To prioritize the developing Asian countries and leave western buyers to rely on themselves, the Saudis cause obvious negative consequences for the tankers, as this will lead to deliveries of shorter distances and smaller loads. The supertankers already preparing for its worst year since 2013, but probably the downtrend will continue during the next year.

However, there are many moving parts that determine where the barrels of oil flow. The demand for tankers will take the hits if there is less supply from the Atlantic to Asia, which is a very long route. The companies that offer cheaper transport will make such deliveries seem financially attractive. If one region receives a larger share than other prices are adjusted, which redirects also the cargo. The oil flows will will depend on the degree of reduction in yield.

During the first nine months of the year, Saudi Arabia has supplied about 3.1 million barrel per day to key Asian countries including China, Japan and South Korea. The flows to American countries in the OECD (Organization for Economic Cooperation and Development) were 1.2 million barrels per day, and to Europe were 0.826 million barrels per day.

OPEC promised on November 30 to reduce production by 1.2 million barrels per day, overcoming skepticism about the deal. The countries outside the group said on December 10 that will also contribute to the deal and will limit production with another 0.558 million barrels per day.

Countries, which participate in the limit yields, have begun to notify refineries for plans for supplies in January, signaling trade routes that will be hit. The oil company Saudi Aramco plans to retain their full contracted supplies to at least five Asian refiners. Kuwait also prioritizes Asia, according to a representative of its state oil company.

Although Saudi Aramco reduced sales in some parts of Southeast Asia in January, Saudi Arabia sold full oil contract under long-term agreements for next month at Northeast Asian countries, including China and Japan, which are key areas of demand. Maintaining supplies to China is essential as competitive imports from Russia are steadily increasing.

Meanwhile, Saudi Aramco has begun to notify customers that gradually decreased supplies to Europe and North America. According to a European refinery, the share of Saudi oil will drop by 20% next month.

OPEC is well aware and large stocks of visible markets like the US, which is another reason to reduce supply precisely to them. The stocks of crude oil in the US affect prices more than any other part of the world. If the member countries of OPEC really want to influence prices, they will target the lower flows to the United States.

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