Saudi Arabia isn’t just a one-trick pony when it comes to the energy market.
A casual observer might think that the country’s energy game plan is as simple as keeping the spigots wide open in order to pressure U.S. shale oil producers.
But, Saudi Arabia is playing a much more complex game…
You see, the kingdom is also busy transforming itself into one of the world’s largest oil refiners. So big, in fact, that its potential capacity is even dwarfing oil majors like ExxonMobil (XOM).
This is sure to shake things up in the industry.
Becoming Highly Refined
Two new refineries – Yasref and Yanbu – have already come online in the kingdom. The new facilities will add 800,000 barrels per day (bpd) of refining capacity.
The planned Jazan refinery will add another 400,000 bpd. The combination will bring Saudi Arabia’s refining capacity to more than three million bpd!
That pushes Saudi Arabia into the top five list of countries in terms of refining capacity. The Kingdom is already in second place, behind the United States, when it comes to refined products exports.
Plus, when you add in Saudi Arabia’s stakes in overseas refineries, such as South Korea’s S-Oil, the Saudis have an excess of five million bpd of possible refined product output.
And the country is not stopping there…
The kingdom’s goal is to have eight to 10 million barrels of global refining capacity within a few years. That amount would put ExxonMobil in the shade.
Refined products are becoming so important to the Saudis, it’s believed that two-thirds of the trading done by the state-owned trading arm, Aramco Trading, is now focused on products and not crude oil.
The Wind Behind the Shift
Curiously, the Saudis have recently turned down requests from China for extra crude oil shipments in May and June.
The Saudis saying no to their best customer is another clear indication of the shift. But why is this happening?
Well, the Saudis aren’t stupid. They see how other big oil conglomerates raked in the profits from refining during the oil price plunge, for which the Saudis were largely responsible.
In the first quarter, trading and refining accounted for 60% of the major oil companies’ earnings! That is a huge jump up from just 18% a year ago.
This shift toward refining also allows the Saudis to be more diversified, adding value-added products rather than just being a seller of crude oil.
The International Energy Agency’s Chief Oil Analyst, Antoine Halff, told Reuters, “In contrast with the crude market, which is shrinking, the product market is becoming more global.”
Winners and the Losers
So, how can investors play this change in Saudi Arabia’s strategy?
Clearly, those in the refined products market sector will have a very large and very tough competitor on their hands now.
But the companies that own product tankers, which will ship Saudi refined products around the world, will get a major boost.
Already, rates for this type of tanker are at the highest level since 2011, doubling in less than a year. For example, the daily cost to send a product tanker from Saudi Arabia to Japan is now above $20,000 per day.
And that’s just the beginning…
Led by the Saudis, sales of refined products from the Gulf region are expected to soar 45% over the next decade, says JBC Energy.
Scorpio Tankers is adding 15 tankers to its fleet just to keep up with demand. It already owns 88 product tankers. Earnings estimates from analysts for the current fiscal year are up 22% over the past month, yet the stock has lagged.
It also has the youngest fleet, with an average age of just 0.9 years versus the worldwide average of 9.4 years.
Ardmore Shipping has a fleet of 18 vessels and should reach 24 vessels by the end of the year, which will give a boost to its bottom line. The average age of its fleet is 3.6 years.
With these companies still mostly ignored by investors, both stocks look profitable at current price levels.
And the chase continues,