Drinking OPEC’s Milkshake
US crude oil production has been the main element in determining perceptions of market balance and price globally. As the main producer worldwide not involved in the OPEC-Russian initiative to cap/cut volume, America has been the outlier for some time. Total daily production volume is now above 9 million barrels.
In fact, the US Energy Information Administration (EIA) estimates that the average 2017 daily production will come in at 9.2 million barrels. That figure is expected to increase to 9.9 million barrels in 2018.
This has become a significant factor in tempering a quicker rise in international benchmark trade pricing, accentuated by rapidly increasing US exports to the rest of the world.
Previously, the US essentially influenced oil prices by the amount of crude imported into the country. But, following a Congressional budget-balancing decision in December 2015, an over forty-year prohibition on US crude exports has ended.
Today, daily US crude oil export volumes average about 1.5 million barrels, although they did spike to a record 2.1 million barrels at the end of October. The market is coming to the end of 2017 with aggregate US export volume about 200% higher year-on-year.
Now, the overall objective in the OPEC-led 1.8 million barrel per day cut in overall production – now extended to the end of 2018 and including Libya and Nigeria (two producers not participating in the original agreement) – has been to balance the market by drying up excess storage.
The normal perception is that such a balance would serve to support higher prices, while a rise in US exports would restrain the rise. Yet, it is no longer such a simplistic zero-sum situation.
For one thing, the increase in US exports is fueled by lighter and sweeter (lower sulfur content)-grade shale and tight oil production. While in theory a more desirable grade (since the lighter and sweeter the oil, the less expensive it is to process it), US exports are hitting a ceiling worldwide.
That’s because much of the refinery capacity in those areas of the world where US exports could register, at least on paper, the greatest price margin advantage over domestic sales cannot easily process the US grade.
The apparent global higher-priced market, therefore, especially the Asian market where most of the add-on in demand will come over the next several decades, is not attractive for a wave of new US volume.
However, the main element in the global balance is not nominal volume, but where the import-export dynamics are directed. This matter addresses balance rotation.
And here, several developments are of note in what has emerged as a main change in trade flow. Take these three as good examples.
The Asian Rotation
First, national oil giant Saudi Aramco announced yesterday (December 11) that it was cutting crude exports to Asian customers in January by more than 100,000 barrels a day to help accelerate the rebalancing of the international oil market.
Yet Aramco sources confirmed that export levels to both US and Europe would remain the same as those in December.
Some of the move is explained by a Saudi decision to exceed its production cut quota in support of the November 30 OPEC/non-OPEC decision to extend the accord beyond its March expiration to include all of 2018.
Current estimates show OPEC fulfilling 112% of its organization-wide production cut commitments.
Yet another aspect to consider is what has emerged as a sidebar Saudi-Russian understanding. Both countries recognize that their national export levels are becoming more influenced by the Asian market.
In fact, when the Saudis decided to lead the OPEC move in November of 2014 to defend market share rather than price, driving the price down made it more difficult for Russian ESPO export crude to compete in Asia. ESPO blend has a lower sulfur content than Saudi exports, but could not compete when the price was being driven down to $40 a barrel and below.
Providing a slightly better Russian share of the current exports to Asia may well have been an element in enticing Moscow to continue abiding by the production accord. Here, US exports may have some impact but will not be a primary drive in affecting the balance.
OPEC Members Vie to Bring US Supplies
Second, the accelerating crisis in Venezuela has resulted in US imports of PDVSA crude collapsing to the lowest level since the beginning of 2003. Last month, the Venezuelan company and its joint ventures exports barely 475,000 barrels a day to US end-users, a 36% decline year-on-year and a 12% slide from October.
According to OPEC data, member Venezuela has lost at least one million barrels a day of production in less than four years with daily extraction levels contracting to less than two million barrels in October.
The rapid decline has obliged PDVSA to draw more crude from its Orinoco Belt joint ventures for its domestic refineries, affecting the volume available for exports and affecting the company’s hard currency revenues.
This has particularly hit Venezuela’s Petropiar joint venture with Chevron. There, volume redirected for domestic processing has cut exports to the US to less than 33,000 barrels day for more than 106,000 last year, according to Reuters data.
Both PDVSA and the state sovereign debt to which it is closely tied have effectively moved into a selective default with the clock ticking on triggering cross-paper calls for expedited payment.
Finally, US imports of Libyan, Angolan, and Nigerian crude hit multiyear highs in periods this year. This development is all about crude cost differentials at US refineries. These are also preferred grades, with Libya and Nigeria producing some of the lightest and sweetest crude in the world.
That rotation is now over as the cost advantage has become less attractive.
Additional factors include US-Mexican crude trade, Russian ability to control international access to Kazakh export flows, and the ongoing Iraqi-Kurdish impasse. In each case, a rotation ensues in sourcing with US export production having a potential impact.
But the most important takeaway is this. The impact of both US crude production and export levels is not about the independent effect either has on the international market but the way in which it folds into accelerating rotation happening anyway.