Rarely does a day go by without Donald Trump berating the Federal Reserve for not delivering more monetary easing measures. Yesterday was no different only this time the US President got his wish. The Fed shocked investors with an emergency rate cut of 50 basis points to counteract the impact of the coronavirus. This was the first unscheduled cut since the depths of the 2008 financial crisis. Yet far from easing virus anxieties, the surprise move had the opposite effect. Market players fretted over the suddenness of the Fed’s decision. The view was that it smacked of desperation and amplified fears that a US downturn is taking hold. As a result, a short-lived boost to sentiment quickly fizzled out and a hefty sell-off ensued. Shares on Wall Street closed nearly 3% lower while the 10-Year Treasury yield fell below 1% for the first time in history.
The Fed’s shock-and-awe tactics came after central banks in Australia and Malaysia cut their interest rates earlier in the day. It also followed a pledge by the G7 finance ministers to take coordinated action to safeguard the global economy. This underscores how markets have developed an unhealthy addiction to monetary and fiscal largesse over the past decade. They appear wholly dependent on stimulus for their next fix to point them in the right direction. However, as the past 24 hours have shown, central bank intervention can only go so far in the current environment. No amount of stimulus can ward off a global pandemic. In other words, stimulus-driven rallies are built on wobbly foundations and should be viewed with increasing scepticism.
As the world’s central banks tried in vain to cushion the economic blow from the coronavirus, the pre-OPEC meeting rhetoric began in earnest. Kuwait’s oil minister expressed optimism over the expected outcome of this week’s meeting. His Algerian counterpart hinted at new substantial cuts. This was echoed by a technical panel of OPEC+ officials which recommended cutting output by up to 1 mbpd. This was more than last month’s suggestion of 600,000 bpd. Nevertheless, the deeper supply curbs will still fall short of depleting global oil stocks in the near-term. All this made for a choppy session in which Brent eventually settled 4 cts/bbl lower on the day at $51.86/bbl and $2/bbl off its session high. WTI fared better with a daily advance of 43 cts/bbl and finish at $47.18/bbl. Further price volatility is guaranteed as OPEC+ faces a make-or-break decision.
Another year, another record
Full-year data for 2019 from the EIA is now in and highlights what was another golden year for the US oil patch. Indeed, the past year has very much been a case of business as usual in the US. For starters, the crude growth engine maintained its seemingly perennial upswing. Output grew 11% last year compared to 2018 and in doing so surpassed 12 mbpd. All the while, US crude continued to reach far-flung destinations in increasing volumes. Exports averaged a record 2.98 mbpd in 2019, up from 2.05 mbpd in the previous year and set a monthly record of 3.67 mbpd in December. In short, US crude shipments are on such a tear that they are spearheading a fundamental paradigm shift on the global oil market.
While the explosion in US crude exports has been well documented, the other side of the trade coin warrants closer examination. This is because US crude imports are in the midst of an unprecedented decline. The upshot of this long-running retreat is that America’s intake of foreign crude fell to 6.8 mbpd last year. This was down from 7.77 mbpd in 2018 and the lowest annual reading since 1993. Underpinning this pullback is a drop in US-bound crude cargoes from the oil cartel. US crude imports from OPEC nations averaged 1.48 mbpd last year, down from a pre-shale peak of 5.4 mbpd and the lowest since 1996.
The diverging trajectories of US crude exports and imports have acted as a boon for America’s waning dependence on foreign crude oil. A key measure of US crude dependency can be gauged by dividing US gross crude imports by total crude imports and domestic production. This ratio has been trending lower since unexpectedly rising for the first time in a decade in 2016. After edging up to 47% four years ago, it eased to 46.01% in 2017 and then again to 41.45% in 2018. Last year brought with it a further decline to an all-time low of 35.71%. Few would bet against this downward trajectory being maintained in the years ahead even as the US shale boom loses its mojo.
All the while, adding to this narrative of growing energy independence is strong growth in US product exports. Shipments of refined products averaged a record 5.59 mbpd in 2019. Together with rampant US crude exports, this paved the way for the US to become a net exporter of crude and oil products on a monthly basis last September for the first time. This unprecedented feat was maintained in the year-end period. Little wonder, then, that expectations are rife that the country is well on its way to becoming a net petroleum exporter on a sustained basis. Adding credence to this outlook is the latest edition of the EIA’s Annual Energy Outlook. The key takeaway from its long-term projections is that the US will become a net exporter of crude and refined products in 2020 for this first time since 1953. Furthermore, far from being a one-off event, the EIA expects the US will export more petroleum than it imports from 2020 to 2050. Net exports of U.S. petroleum and other liquids are projected to peak at more than 3.8 mbpd in the early 2030s before gradually declining as domestic consumption rises.
All of this will be music to the ears for Donald Trump. The US President has made the pursuit of US energy security and independence a cornerstone of his “America First” campaign. While he can take heart for succeeding where his predecessors have failed, it has not been without cost. The surge in US crude production coupled with the explosion in exports has thwarted OPEC’s rebalancing ambitions. The resulting supply surplus has most recently been compounded by a virus-induced demand shock. Simply put, downward pricing pressures are expected to linger in the near-term, much to the chagrin of cash-strapped US shale firms.