As the oil market strengthened yesterday pre-EIA, after the slump on Tuesday, the result of an old survey popped into mind. The majority of the respondents thought that a country, where illiteracy is STILL 4% should be ashamed of itself. Well over half of another group surveyed was convinced that a country, where literacy has ALREADY reached 96% deserves nothing but compliments. The same end results with diverging interpretations. Tuesday’s fall was partly due to the reported Russian reluctance to endorse deeper cuts for next year when the current output deal runs out at the end of the first quarter. Yesterday’s strength during London morning and early afternoon was triggered by President Putin. He said that Russia and OPEC have a common goal in balancing the oil market and will continue to co-operate. These were no contradictory statements, yet the difference in reactions could not have been starker. The key takeaways are that sometimes the packaging is as important as the content and that the current supply agreement is unlikely to fall apart. The oil market will be managed by the OPEC+ group next year. Whether it will lead to actual stock depletion remains to be seen.
And then the weekly US inventory report was released. The data was not particularly exciting and under different circumstances the reception of the stats would not have been bullish. The stage, however, had already been set and as the EIA figures were less negative than the API from the previous night there was only one way for prices to go. The build in crude oil stocks (+1.4 million bbls) matched the forecast and was much lower than the API estimate. East of the Rockies saw a combined draw of 0.5 million bbls with Cushing inventories declining by 2.3 million bbls. The build in gasoline stocks (+1.8 million bbls) was below the API number and distillates drew more than forecast (-1 million bbls). Commercial stocks fell by 5 million bbls with the aid of the 7 million bbls decline in the ”other products” category and they are currently 0.8% below the 5-year average.
The jump in oil prices yesterday was impressive by anyone’s standard but further short-term gains are far from guaranteed. We still believe that a trade agreement will be struck between the US and China, which would ultimately lead to upward revisions in GDP and oil demand growths. The road there, as we learnt yesterday, is set to be rocky. White House sources imply that Phase One of the negotiations might not be completed this year due to Chinese demand on rolling back tariffs. It could easily mean that the US administration will go ahead implementing the 15% tariffs on Chinese imports worth $156 billion on December 15. Under this scenario both equities and oil are expected to come under pressure. As talks hit a snag an upside break-out from the current trading range all of the sudden has become less imminent
Declining US thirst for foreign crude
The US is edging towards independence from foreign oil. Although domestic refiners still rely on a decent volume of foreign crude this reliance is definitely decreasing. Annual data suggests that the US imported slightly over 7 mbpd of crude oil in the January-August period this year. This is down from 7.77 mbpd in the whole of 2018 and from 10.13 mbpd in 2005, the highest annual reading ever.
If anyone wonders what shapes the US foreign policy the composition of the import figures is rather telling. OPEC exporters are losing significant ground to non-OPEC producers, both in absolute as well as percentage terms. In 2005 OPEC sent 4.82 mbpd of crude to the United States. Non-OPEC producers exported 5.31 mbpd. In percentage terms OPEC had 48% of the US crude oil import market and the balance of 52% went to non-OPEC. This year member countries of the cartel have managed 1.57 mbpd (a decline of 67% over the past 14 years) whilst non-OPEC exports rose marginally to 5.44 mbpd, an increase of 2%. OPEC’s market share has fallen to 22% and non-OPEC’s has jumped 78%.
The relative increase of non-OPEC dominance was exclusively down to Canada. The northern neighbour of the US has succeeded in increasing the volume it ships over its southern border every year since 2000. At the beginning of the millennium they exported 1.35 mbpd, five years later 1.63 mbpd and this year’s average for the first eight month stands at 3.84 mbpd as the country’s production more than doubled in the last nineteen years. Canada now has 55% of the US crude oil import market as opposed to 16% in 2005. On one hand it is an impressive achievement, on the other, given the rise in the country’s oil production and its geographical proximity to the US, probably it is a natural development.
As said above OPEC’s crude oil exports into the US have been down by 3.42 mbpd over the past 14 years. Of these losses, 1.27 mbpd occurred amongst Persian Gulf producers with Saudi Arabia leading the way. The US ally in the Middle East exported 1.45 mbpd in 2005. This figure is down at 540,000 bpd this year. The Saudi slice of the cake has shrunk 63%. No wonder that there is hefty competition for the Asian market and the occasional Saudi cargo even finds its way to Northern Europe, not the most traditional destination for the Kingdom.
The decreasing reliance is the direct result of the continuous increase in domestic crude oil production. There is a tangible negative correlation between the two sets of data over this century – it is -90%. The dependence on foreign crude has dived from over 66% in 2005 to 37% this year. As long as US output is on the rise and more than matches the growth in domestic demand this dependence is set to fall further. Under this scenario the US will play hard ball with its Middle East foes like Iran.