The fairytale crude rally that pushed Brent above $80/bbl looked to be in trouble on Thursday. Both crude markers kicked the day off with chunky drops amid the prospect of Russia stepping up gas supplies together with the release of crude stocks from the US SPR. Yet oil prices bounced off their lows to turn higher. By the close, Brent and WTI tacked on 87 cts/bbl to settle at $81.95/bbl and $78.30/bbl respectively. Intraday price swings are making a comeback and suggest that anxiety over the energy price crunch has by no means been removed.

As the energy markets continue to show their erratic side, the key question is whether prices will continue to extend their gains or head lower from here. The fundamental case for higher prices is strengthening given the backdrop of a tightening balance. However, stability is still in short supply and further retracements cannot be excluded. In the meantime, oil will likely take its cues from today’s non-farm payroll report. Expectations are that 490,000 jobs were added last month, up from the somewhat worrying 235,000 positions created in August. Confirmation that the US labour market is recovering in the post-pandemic world will be key if oil prices are to maintain their bullish momentum.

Gorging on foreign crude

American energy independence advocates look away now – US crude oil imports are trending higher. Shipments averaged 6.4 mbpd over the last four-week period, 22.7% more than the same four-week period last year, according to the EIA. In the week to October 1, imports scrambled above 7 mbpd for only the second time since June 2020. At the same time, total net oil imports rose to their highest since August 2019 as crude exports declined for the first time in a month.

So why is the US once again feasting on foreign crude? First and foremost is the muted supply response. US crude production has been slow to recover following steep output cuts made in 2020 in response to the demand destruction imposed by virus outbreaks. More recently, US crude supply has been limited by weather-related disruptions, most notably Hurricane Ida. Around 200,000 bpd of US Gulf of Mexico oil production is still offline more than five weeks after the storm made landfall in Louisiana.

All the while, US oil demand is buoyant and continues to hold well above 2020 levels. Total products supplied — a key measure of fuel demand — averaged 20.7 mbpd over the last four-week period, up 16% from the same period last year. In the week ending October 1, US petroleum product supplied totalled 21.5 mbpd, a 17% increase from the same week in 2020 and on par with the same week in 2019. In turn, this has supported refinery utilisation rates. US crude oil refinery inputs averaged 15.7 mbpd in the last week, which was 330,000 bpd more than the previous week’s and slightly ahead of the same week in 2019.

The US crude complex is currently a case of domestic supply lagging demand hence the upswing in imports. This is acting as a boon for some of the world’s major oil exporters, and none more so than Canada. Weekly oil deliveries from America’s northern neighbour reached 4.04 mbpd last week, the most since January, according to the EIA. It’s only the third time the US has imported more than 4 mbpd of Canadian crude since the agency began compiling weekly data in 2010.

The latest surge in Canadian flows is thanks in part to the start-up of a long-delayed pipeline. Enbridge’s Line 3 Pipeline Replacement project was put into service at the start of this month, ending much of the pipeline bottleneck into the US. It can transport 760,000 bpd of heavy and light oil, nearly double the size of the old line it replaced. The finished project assures Canadian producers their growing oil sands crude output will have access to US markets.

The additional barrels from Canada is timely given that US refiners are struggling with less supply from OPEC+, shrinking imports from Latin America, and ongoing production outages in the Gulf of Mexico. More Canadian crude is expected to make its way south of the border in the coming weeks amid the continued shortfall in US medium sour crudes. All in all, the current upswing in US crude imports will likely become the new norm during the year-end period. Consequently, the US is a virtual shoo-in to register its first annual increase in crude oil imports since 2017, much to the detriment of the country’s energy independence ambitions.