Like the Grinch, the season of goodwill seems lost on the US President. We are barely halfway through the week and the self-declared “Tariff Man” has already made a series of protectionist moves. On Monday, he made the surprise announcement that tariffs on steel imports from Brazil and Argentina would be restored. As if for good measure, he also threatened to impose new punitive tariffs on European goods. Then yesterday he gave investors more reason to fret. Donald Trump claimed there was no deadline for striking an agreement with China. He added that he was prepared to wait until after the presidential elections in November 2020 for a deal.
Such nonchalance triggered a fresh bout of trade worries. Hopes that a deal with be struck by the end of this year have been dashed. Furthermore, fears are rife that the US will impose another swathe of tariffs on China on December 15. In any case, as with all things Trump, his latest remarks should be taken with a pinch of salt. That said, the prospect of a longer and broader trade war is especially pertinent for the oil market. That is because those betting on a price rebound in 2020 have put all their eggs in the trade basket. Such upbeat predictions will be left in tatters should Washington and Beijing fail to strike an agreement in the coming months.
Only time will tell whether those of a bullish disposition will be forced to eat a slice of humble pie. For now, the lack of urgency on the part of the US President sent ripples across financial markets. Risk assets were off the menu on Tuesday. The Dow Jones lost 1% in what was its worst day in nearly two months. Oil fared better and recovered from an initial slide to end the session little changed. Brent slipped 10 cts/bbl to settle at $60.82/bbl while WTI finished 14 cts/bbl higher at $56.10/bbl.
Both crude markers are gaining ground at the time of writing amid expectations for a decrease in US crude stocks. Overnight, the API reported that crude stockpiles fell by a forecast-beating 3.7 million bbls last week. Conversely, product stocks trended higher. Gasoline inventories rose by a bigger-than-expected 2.9 million bbls. Meanwhile, distillate fuels stockpiles rose by 794,000 bbls which was slightly below forecasts. As much as oil bulls will cheer this morning’s flurry of buying, it will count for nothing unless OPEC+ delivers a positive message at the end of this week.
Independence Day II
The market may be preoccupied with OPEC’s will-they-or-won’t-they antics but it’s very much a case of business as usual in the US. Crude production is on what appears to be a perennial upswing. Output rose by 66,000 bpd to a record 12.46 mbpd in September, according to the EIA. All the while, US crude is reaching far-flung destinations in increasing volumes at the expense of those oil-producing countries on Washington’s bad list. Exports regularly top the 3 mbpd threshold and have increased by 900,000 bpd or 46% in the first nine months of this year compared to January-September 2018. In other words, 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 6.48 mbpd in September, the lowest since March 1994. Underpinning this pullback is a drop in USbound crude cargoes from the oil cartel. US crude imports from OPEC nations averaged 1.436 mbpd in September which was down from 2.673 mbpd a year earlier and close to the lowest since March 1986.
Within the producer group, the drop off in US-bound shipments has been largely borne by two members, namely Saudi Arabia and Venezuela. US imports of Saudi crude stood at 458,000 bpd in September, close to July’s three decade low of 395,000 bpd and a far cry from a pre-shale annual peak of 1.6 mbpd. Meanwhile, America completely shunned Venezuelan crude for a fourth straight month in September. Yet this fall from grace should not come as a surprise. After all, the Saudis are spearheading a supply cut pact with allocation reductions falling hardest on US customers. As for Venezuela, the Latin American producer has been targeted by US sanctions which have undermined its ability to market its crude to its once-biggest customer.
The diverging trajectories of US crude exports and imports have acted as a boon for America’s waning dependence on foreign oil. Latest EIA monthly data reveals that the US shipped more oil than it imported in September for the first time in the 70 years since records began. Simply put, the country is well on its way to becoming a net exporter of crude and refined products on a sustained basis. What is more, the concurrent fall in net US crude imports and uptick in domestic production has favourable implications for US crude dependency. A ratio of gross crude imports to combined crude imports and domestic production, it has been trending lower since unexpectedly rising for the first time in a decade in 2016. After edging up to 47% three years ago, it eased to 46.01% in 2017 and then again to 41.45% in 2018. The first nine months of 2019 has brought with it a further decline to 36.61%. Few would bet against this downward trajectory being maintained in the years
ahead even as the US shale boom shows signs of cooling.
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 kept oil prices under the cosh. Moreover, downward pricing pressures are expected to intensify at the turn of the year as a supply imbalance comes to bear. Needless to say, this spells bad news for cash-strapped US shale firms.