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U.S. shale oil production could impact Saudi light grades

BY WAEL MAHDI

RIYADH, Saudi Arabia (Bloomberg) -- U.S. light oil production from shale and tight rock formations may impact Saudi Arabia in the medium-term by forcing it to sell its lighter grades at lower prices, according to Jadwa Investment Co.

The price difference between light and sweet grades of crude oil, which contain less sulfur and yield more transportation fuels, and heavier and sour grades will narrow as the U.S. adds more light crude from shale formations over the next five years, Fahd al-Turki, the chief economist at Riyadh- based Jadwa, said in a phone interview today.

Saudi Arabia, the world’s largest crude exporter, probably won’t be affected in the longer-term as new North American supplies of shale-derived light oil will only represent around 3 percent of global liquids output, al-Turki said.

The narrowing in light-heavy crude price differentials will help improve margins of European refiners who process more light oil than U.S. processors, he said.

“The impact on Europe is going to be positive and the narrowing of light-heavy price differentials will restructure the global refining industry,” he said.

Shale formations will help the U.S. to produce about 9.6 million barrels a day of crude oil in 2016, a level it reached in 1970, the U.S. Energy Information Administration said on its website yesterday. While domestic crude oil production is projected to level off and then slowly decline after 2020, natural gas production will grow steadily, with a 56 percent increase between 2012 and 2040, the EIA said.

Production of “cheap” natural gas liquids from tight oil and shale gas formations will have more impact on the world’s petrochemical industry and Saudi Arabia than shale oil, according to a Jadwa report published today. As more feedstock becomes globally available at lower prices, Saudi Arabian petrochemical producers, who enjoy low-cost feedstock at home, may see their “comparative profitability” fall, Jadwa said.

Saudi Arabia has limited ability to raise its natural gas output, which may make petrochemical producers such as Saudi Basic Industries Corp. consider expanding their capacity in the U.S. to profit from abundant and cheap feedstock, Jadwa said.

12/17/2013

 

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