US Oil Exports to Flood the Market

US Oil Exports to Flood the Market

$USO, $OIL

FLASH: This is the Era of US Crude Oil

What started as an American phenomenon is now being felt around the world as US Oil exports rise to marks not thought possible a few years ago.

The flow of Crude Oil will keep growing over the next few years with major consequences for the industry, global politics and even economies.

OPEC will face challenges keeping prices high, while Washington has a new, and potent, diplomatic weapon to keep prices low

American exports stepped up a gear last year, rising more than 70% to 2-M+ BPD, according to government data. Over the past 4 weeks, US exports have averaged more than 3-M BPD.

‘This is the new American energy era,’ US Energy Secretary Rick Perry told an industry conference in Houston earlier this month.

Oil traders and shale executives believe US Crude Oil exports are set reach 5-M BPD in Y 2020, + 70% from current marks. If the US makes that mark, America will be exporting more Crude Oil than every country in OPEC except Saudi Arabia.

“The 2nd wave of the US shale revolution is coming,” said the head of the International Energy Agency. “This will shake up international oil and gas trade flows, with profound implications for geopolitics.”

The political impact is already being felt. The Trump administration has been able to impose aggressive sanction on oil exports from Iran and Venezuela knowing the flow of crude from Texas will keep on rising. The economic impact on the U.S. is also evident: in dollar terms, the country’s petroleum trade deficit fell to its lowest in 20 years in Y 2018.

The US is already a big exporter of refined products such as gasoline and diesel. When combined with rising crude exports, the IEA forecasts American petroleum exports will reach roughly 9-M BPD within 5 years, up from just 1-M in Y 2012. In the process, the US will become the world’s 2nd-largest exporter of Crude Oil and refined products by Y 2024, overtaking Russia and nearly topping Saudi Arabia.

“All the incremental Permian production needs to be exported,” said Raoul LeBlanc at consultant IHS Markit Ltd. The Permian needs to find refineries willing to take US light sweet Crude as a base-load, most likely in Asia.”

Despite a tight Crude Oil market due to American sanctions on Venezuela and Iran mixed with OPEC production cuts, finding new buyers isn’t as easy as it sounds. The crude from the Permian is light, yielding lots of naphtha — used in the petrochemical industry — and gasoline, but comparatively little diesel. And most refineries want to produce diesel.

Until now, US shale producers and oil traders had been selling most of their crude on spot transactions.. As a result, American exports saw wildly different destinations from month to month, from Spain to Thailand to Brazil.

A few stable markets are starting to emerge.

Oil refineries in Canada, Italy, the UK, and SKorea are becoming regular buyers. And little by little traders are securing long-term deals with overseas refineries, known as term contracts.

Yet, the rapid rise in Crude Oil exports is challenging. Not even Saudi Arabia in the 1960’s and 1970’s saw exports grow so quickly.

‘The US export market needs to transition from infancy to adulthood far more rapidly than any major exporter ever has,’ said another analyst at IHS Markit.

US Shale Crude is already selling at a big discount to ICE Brent Crude Oil, the international benchmark.

NYMEX WTI Crude Oil sells nearly $10 under ICE Brent. And some of the lighter grades from the Permian, including a new stream called West Texas Light, are seeing even wider discounts.

Finding buyers for the light Permian crude is not the only obstacle.

Pipelines and ports have become the biggest bottleneck in US Crude Oil exports, with traders engineering logistically complex chains combining railways, trucks, pipelines, barges, and ship-to-ship transfers to get Crude Oil out of the country. Several ventures are aiming to build new facilities to allow exports via supertankers, which need deep-water ports.

The export surge started in late Y 2015 when Washington lifted a 40-year ban on most Crude Oil sales overseas, imposed in the aftermath the 1973-74 embargo by the Arab members of the Organization of Petroleum Exporting Countries (OPEC)

Traders anticipate that America will add another 1-M BPD this year to its production, with the bulk coming in 2-H.

If the forecast is correct, US Crude Oil production will surpass 13-M BPD by December, up from 11.8-M BPD at the end of last year and well above the all-time high set in Y 1970.

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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