Here’s the Next Biggest Threat to Global Crude Oil Prices

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.

Bloomberg

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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