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Will OPEC Russian Pact Hold? Does it Matter?

04/16/2019 11:47 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Crude oil is trying for a turnaround Tuesday after taking a breather Monday, writes Phil Flynn.

Crude oil is trying for a turnaround Tuesday after taking a breather Monday on worries that Russia is getting uneasy with rising shale output. That raised concerns that Russia may start to falter when it comes to keeping OPEC together and staying with their agreed upon production cuts. Yet despite those worries, the reality is that Russia is still complying with cuts and while the Energy Information Administration (EIA) is still showing optimism about the trajectory of U.S. production, many in the industry are not. The EIA in their Drilling Productivity Report showed that the rig weighted production average of new-well oil production per rig increased from 676,000 to 692,000, up 16,000 per well. At the same time, they reported that drilled, but uncompleted wells, fell from 8,504 in February to 8,500 in March.

Oil may also get support today from talk of a big drop in Cushing Oklahoma oil supply. Many projections of an oil supply increase by Wall Street Analysts may be wrong and we might instead be headed for a sizeable crude oil supply draw. The petroleum product outlook should also be supportive; as strong demand, refinery maintenance and winter gasoline blend cleansing should lead to drawdowns on the product side. Oil builds in recent weeks were heavily impacted by Houston Shipping Channel issues. That may reverse crude stocks in a big way as U.S. exports may surge as more of the world wants our light crude oil.

The EIA reported that in 2018, U.S. exports of crude oil rose to 2.0 million barrels-per-day nearly double the 1.2 million rate in 2017. Export volumes by destination changed significantly during the year, as U.S. crude oil exports to China fell and exports to other destinations such as South Korea, Taiwan, and Canada increased. The increase in U.S. crude oil exports was the result of increasing U.S. crude oil production and infrastructure changes. U.S. crude oil production increased 17% to 10.9 million barrels-per-day in 2018, with U.S. Gulf Coast states—the departure point for more than 90% of U.S. crude oil exports—producing 7.1 million. The increased production is mostly of light, sweet crude oils, but U.S. Gulf Coast refineries are configured mostly to process heavy, sour crude oils. This increasing production and mismatch between crude oil type and refinery configuration causes more of U.S. crude oil production to be exported.

In early 2018, the Louisiana Offshore Oil Port (LOOP) in the Gulf of Mexico was modified to enable the loading of vessels for crude oil exports. LOOP is currently the only U.S. facility capable of accommodating fully loaded Very Large Crude Carriers (VLCC), vessels capable of carrying approximately 2 million barrels of crude oil. After LOOP was modified to also allow exports, the increase in cargo scale led U.S. crude oil exports to surpass 2 million barrels-per-day for 25 weeks in 2018 compared with just one week in 2017. In addition to LOOP, other U.S Gulf Coast export facilities in and around Houston and Corpus Christi, Texas, have been investing in increasing the scale of U.S. crude oil export cargos.

In 2018, Asia was the largest regional destination for U.S. crude oil exports, followed by Europe, while, as in previous years, Canada was the largest single destination for U.S. crude oil exports. Canada received 378,000 barrels-per-day of U.S. crude oil exports, representing 19% of total U.S. crude oil exports in 2018. South Korea surpassed China to become the second-largest destination for U.S. crude oil exports in 2018, receiving 236,000 barrels-per-day compared with China’s 228,000.

The EIA went on to say: “However, the distribution of U.S. crude oil exports by destination varied significantly from the first half of 2018 to the second half. In the first half of 2018, the United States exported 376,000 barrels-per-day of crude oil to China, which made China the largest single destination for U.S. crude oil exports for that period. However, in August, September, and October of 2018, the United States exported no crude oil to China. U.S. crude oil exports to China resumed in the final two months of the year but at much lower volumes. On average, the United States exported 83,000 barrels-per-day of crude oil to China in the second half of 2018. In the summer of 2018, as part of ongoing trade negotiations between the United States and China, China temporarily included U.S. crude oil on a list of goods potentially subject to an increase in import tariffs. Around that time, the difference between the international crude oil benchmark Brent and the U.S. domestic price West Texas Intermediate (WTI) futures prices narrowed: Brent prices went from $9 per barrel higher than WTI in June to $6 higher than WTI in July.

The rapidly narrowing price discount of U.S. crude oils versus international crude oils and the potential for higher import tariffs caused China’s imports of U.S. crude oil to slow. As U.S. crude oil exports to China fell, exports to South Korea, Taiwan, Canada, and India increased. Ultimately, the rate of crude oil exports to all destinations in the second half of the year (2.2 million barrels-per-day) was higher than in the first half (1.8 million).”

Holiday Markets can be crazy but there is nothing that suggests that the bull move in oil and products is over yet. We expect that after a choppy trade this week we will get another leg up next week.

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