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Oil Fundamentals: Reserves and Import/Export Dynamics

The present study belongs to the Oil Fundamentals project that the HyperVolatility team initiated a few weeks ago with the article “Oil Fundamentals: Crude Oil Grades and Refining Process”. Credit must be given to Liying Zhao (Options Engineer at HyperVolatility) for helping me to gather the necessary material.

This analysis will provide information regarding the demand and consumption of oil on a global scale and it will subsequently examine the import/export dynamics.

The first variables that will be observed are oil reserves. Oil reserves are those quantities of oil whose availability is documented by geo–physical and engineering studies of the oil–well under examination and whose extraction falls within the parameters indicated by current economic conditions (transactional and operational costs) and structural resources (equipment and technology at disposal). In other words, it is the oil whose presence has been proven and that can be extracted given the current level of transactional costs and machinery’s sophistication. According to recent researches, OPEC countries possess more than 70% of the world proven reserves but Venezuela and Saudi Arabia are the largest “containers” on the planet. There is a standardized and worldwide recognized way to look at reserves: the Reserves–to–Production Ratio. The R/P ratio is a fairly simple number which expresses, in terms of years, how long oil reserves for a specific country would last assuming that the current extraction rate would remain constant over the years. It goes without saying that the calculation for the R/P ratio is trivial because it is performed by simply dividing the oil reserves at the end of the year by the production for the year. The next chart displays the R/P ratio for all continents (the data have been provided by British Petroleum):

Oil Reserves to Production Ratio

The interpretation of the above reported graph is very straightforward: the numbers on the Y axis measures the years it would take to terminate all oil reserves starting from December 2012. For example, Europe and North America would take almost 22.3 and 38.6 years respectively to finish all reserves should the current production rate remains constant in the upcoming years. The African continent would employ 37.7 years, the Asia–Pacific region would need only 13.6 years while the Middle East has 78 years of proven reserves. On the other hand, the “best equipped” part of the world is constituted by Southern and Central American countries with almost 122 years of available oil. It is interesting to notice that the whole world, according to this study, would finish its reserves in the 2065. The reason petroleum liquids have been shrinking is obviously due to an ever increasing global demand which went from 32 – 33 million barrels per day at the beginning of the 70s to 83 – 84 millions in the 2011 – 2012 (the International Energy Agency forecasted that the global demand will increase to almost 92 million barrels per day in 2014). The largest oil consumers are without a doubt the countries with a high industrial development rate: USA and European countries. USA remains the largest single oil consuming country because it employs 25% of the total oil extracted on the planet but the current scenario is changing rapidly. In fact, China, Japan and India are now becoming key market players and their internal markets are heavily weighing on global demand and price levels. Let’s now focus on imports/exports dynamics.

Many countries both import and export large amounts of oil but there are some of them which consume more than what they can produce, so they have to import the rest, and others that use only a very small part of what they extract, so they can export more. The following chart shows the top 20 oil importing countries in 2012 (the data have been provided by CIA World FactBook):

Oil Import

It is evident that the United States are the largest single oil importing country in the world with more than 10 million barrels per day followed by China (5 millions), Japan (4.39 millions), India (3 millions) and Germany (2.67 millions). However, if we group together all the import figures for the European countries in the top 20 we see that the States (10 million b/d) import almost as much as Europe (13.8 million b/d). The chart highlights that many Asian developing countries, excluding China and India, are suddenly augmenting their demand and industrial productivity, in fact, South Korea, Singapore, Taiwan, Thailand and Indonesia import almost as much as the majority of Western European countries: 1.5 million barrels every day.

The next graph ranks the top 20 oil exporting countries (the data have been provided by CIA World FactBook):

Oil Export

The top 5 oil exporters in the world are Saudi Arabia (7.63 million b/d), Russia (5 millions), Iran (2.52 million b/d), Arab Emirates (2.39 million b/d) and Norway (2.18 million b/d). The chart clearly highlights the superiority of Middle East countries in the role of global oil suppliers (almost 16.8 million b/d). The only 2 outsiders are Russia and Norway: the former is the only serious competitor that Saudi Arabia has while the latter is ranked at the 5th place because of the Brent Blend oil whose wells are placed in the North Sea. It’s worth noting that the USA does not export its oil (apart from a small part of Alaskan oil) and this is precisely why the States ranks so low. The ranking, however, has lately changed because Russia used to be the biggest oil exporter in the world for many years but a recent change in the policy adopted by the OPEC has re–shaped the oil supply scenario.

So far we have looked at importers and exporters and we know who buys and who sell the most but at this point an obvious question arises: Who buys from Whom?

There are 3 blocks of large buyers: USA, Europe and Asia (Asia means China, India and Japan) and their suppliers are the following:

1) USA imports oil from South and Central America, Middle East and Canada

2) Europe imports oil from Russia, Middle East and North Africa (Libya, Angola, etc)

3) Asia imports oil from the Middle East, Africa and, to a lesser extent, from smaller Asian countries (South Korea, Singapore, etc)

The inter–market connections are high and they range from Europe to Middle East and from Africa to Asia. Nonetheless, the aforementioned list is important to understand why OPEC countries are so important: the oil supply market is literally dominated by OPEC members

The presents study terminates here but the HyperVolatility team invites you to read our previous researches entirely focused on oil and commodity markets:

“The Oil Arbitrage: Brent vs WTI”

“Commodities and Currencies: Inter – Market Analysis”

Oil Fundamentals: Crude Oil Grades and Refining Process

“The Pricing of Commodity Options”

“Commodity Volatility Indices: OVX and GVZ”

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