U.S. Shale Output May Impact Saudi Light Grades, Jadwa Says

U.S. light oil production from shale and tight rock formations may impact Saudi Arabia in the medium-term by making it sell similar grades at lower prices, according to Jadwa Investment Co.

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

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 about 3 percent of global liquids output, al-Turki said. The narrowing in light-heavy crude price differentials will help improve margins for European refiners which process more lighter grades 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,” al-Turki said.

Price Ceiling

With more supplies of U.S. crude coming to the market prices will face downward pressure and Brent may average about $90 per barrel, he said. The benchmark used to price more than half the world’s oil traded at about $108.50 today.

“We will see a big shift in prices and the current price-floor that OPEC is defending will become the price ceiling over the coming three years,” al-Turki said.

Shale formations will help the U.S. to produce about 9.6 million barrels a day of crude in 2016, a level it reached in 1970, the U.S. Energy Information Administration said on its website yesterday. While domestic oil production is projected to level off and then slowly decline after 2020, natural gas output will grow steadily, with a 56 percent increase from 2012 to 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 petrochemical producers, who enjoy low-cost feedstock, may see their “comparative profitability” fall, it said.

Saudi Arabia has limited ability to raise its 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 cheaper feedstock, Jadwa said.

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