At this point it is worth taking stock. This week WTI has lost 7.5% of its value and Brent 6.7%. Heating Oil and RBOB have fallen 5.5% and 3.6% respectively. The front-month WTI spread has weakened 36 cents/bbl and Brent 31 cents/bbl. The Heat spread has remained relatively stable (-5 cents/bbl equivalent since Friday), Gasoil is unchanged whilst Sep/Oct RBOB actually strengthened. The crude contracts, especially WTI, is the bellwether of this move down.
It looks as though that concerns about demand destruction forcing longs to take a very cautious or even panicky approach. Delta is the key word here. This variant has started to spread in China and several other parts of the world leading to lockdowns and mobility restrictions. The curious aspect of this sell-off is that if global oil demand growth is potentially in jeopardy due to the negative economic impact of the virus why equity investors are so sanguine. Both the S&P 500 and the Shanghai Composite indexes have advanced higher this week. Inflation cannot be a worry either; bond yields are resilient.
The rise in tension in one of the choke points of the oil trade, at the Strait of Hormuz has failed to lend meaningful support. The increase of September Saudi OSP to Asia implies that the kingdom expects tighter markets next month, but the price rise has not drawn attention. Delta has overwritten everything.
And then there is the weekly EIA stats. The only disappointing aspect of the latest report was the unexpected crude build, which was the result of a minimal uptick in refinery utilization rates and higher crude oil imports. US product consumption is firmly above 21 mbpd. Weekly gasoline demand stood at 9.8 mbpd and consequently inventories in this product shrank 5.3 mbpd. Total commercial stocks drew 1.2 million bbls despite the crude build and unchanged distillate stocks.
We suspect that the current weakness is of speculative nature. Financial demand is being withdrawn and lengths are being flushed out. This view is somewhat confirmed by the fact that the most liquid and popular oil futures, WTI is leading the way down – both flat price and spreads. It can be suicidal to swim against the current but a sharp reversal in sentiment is firmly in the cards the moment the spread of the virus in China and elsewhere is contained. Until then, even the most ardent bulls will have an open heart for a different view because by now they know it is the resurgent coronavirus that is driving oil prices and nothing else matters.
US oil independence is solid
The changing landscape of the oil market is probably most palpable in US export/import/production figures. The world’s biggest consumer used to rely on foreign oil in order to satisfy its insatiable appetite for energy. This reliance has very often led to wars and flare ups in geopolitical tension as the country was willing to do whatever it took to ensure stable energy and oil supply and consequently the smooth functioning of its economy. The dependence, however, has quickly been waning since the emergence of the US shale industry. The astronomical rise in shale output has overwritten US foreign policy and the country’s relationship with reliable and strong allies.
The changes are most evident in crude oil import figures. OPEC used to own more than 50% of the US crude oil import market. In 1993 the US consumed 6.8 mbpd of foreign oil and OPEC supplied 3.7 mbpd of it, the Persian Gulf leading the way with 1.6 mpbd. OPEC’s slice of the cake was 54%. Fast forward 28 years and the picture could not be different. Not only the US thirst for foreign barrels has fallen sharply, but OPEC has also been forced to give up a large share of the US crude oil market. Gross crude oil import rose from 6.8 mbpd in 1993 to over 10 mbpd in 2007 but with shale production slowly kicking into gear it has been scaled back 5.8 mbpd this year (January-May). The OPEC alliance now only supplies 11% of this shrinking market. The 54% market share that equated to 3.7 mbpd in 1993 is now just above 10% or 670,000 bpd. In 2021 OPEC sends less than 20% of the 1993 volume over to the US. Non-OPEC producers, on the other hand, increased their absolute export volumes to the US from 3.1 mbpd in 1993 to 5.1 mbpd this year. At the same time, they have managed to raise their share of the US crude oil import market from 45.7% to 88.4%. Because of the geographical proximity the biggest winner of these changes is Canada. Due to the discovery of new oil fields and because of the rise in tar sand production the northern neighbour of the US has increased the volume of its crude shipments into the US fourfold. All in all, the US dependency on foreign crude oil has declined from 67% in 2006 to 35% in 2021.
With the emergence of the US shale sector came the liberalization of the export market and the lifting of the crude oil export ban at the end of 2015. Prior to 2006 hardly any US barrels was shipped abroad. Data from 2002 shows that only 9,000 bpd of crude oil left the US shores but now this figure regularly exceeds the 3 mbpd mark. And it is not just crude oil exports that is on the rise. Gasoline exports have grown from about 200,000 bpd in 2007 to 750,000 bpd this year. US refiners have sent nearly 1 mbpd of distillate to foreign countries in 2021 compared to 250,000 bpd 14 years ago. Since the US crude oil export market has opened up and domestic production sits comfortably above the 10 mbpd level gross import figures that were more than 12.5 mbpd above gross exports in 2005, crude and product combined, are now actually showing a deficit. Last year the US was a net exporter of 651,000 bd of crude oil and refined products for the first time ever on an annualized basis. This year, during the January-May period, this figure is 152,000 bpd. The US has managed to achieve complete oil independence. Of course, price, location and quality issues will guarantee that foreign oil will find its way to the US but the country’s relationship with traditional suppliers like Iraq, Nigeria, Venezuela and even Saudi Arabia will not be as strong as it was in the first decade of the century and before.