Actions Speak Louder Than Words

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Includes: BNO, CRUD, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Matt Smith

Editor's note: Originally published on December 15, 2014

With so much talk swirling about the current oil price drop, I feel compelled to focus less on the rhetoric and more on the data. So the vibe of this post lands somewhere inbetwixt Elvis Presley’s ‘a little less conversation, a little more action‘ and one of my boss’s favorite phrases: ‘In God we trust, all others must bring data‘.

First up, let us take a look at the apparent key culprit for the recent sell-off: U.S. oil production. While conspiracy theories may persist about OPEC targeting the demise of the U.S. shale oil revolution, it is impossible to deny how startling the ramp up in U.S. oil production has been in relation to impacting global markets:

Such a seismic change in domestic production has left the U.S. needing to import much less oil. This has been no worse felt than by Nigeria and Algeria (hark, both in OPEC), whose oil exports to the U.S. have fallen by 93% since 2010.

That said, while Nigeria has seen its oil imports drop to virtually zero in recent years (hark, brown line below), Saudi Arabia (blue line) has seen its own imports hold relatively more stable:

This is in part due to Saudi’s self interest in the Gulf Coast region. After all, the largest U.S. refinery is at Port Arthur and is owned by Motiva Enterprises, a joint venture between Saudi Aramco and Shell. Motiva is also the third largest refiner on the Gulf Coast.

ClipperData, a New York firm that tracks global crude movements, provides projections for U.S. oil imports. The chart below shows Arab Gulf imports, which are primarily made up of Saudi and Kuwaiti imports.

According to ClipperData’s projections, Saudi imports should continue to hold up comparatively well. This is a theme which should be maintained into 2015 as both Saudi Arabia and Kuwait cut oil prices in January to the U.S. for the fifth month in a row.

While tumbling prices are a nightmarish scenario for those countries who are highly reliant on oil exports to meet their budgets (think: Venezuela, Iran, Russia), countries who are large importers (like the U.S. and its need for 7.5 million barrels a day) are set to reap the benefits. Below are some statistics to illustrate how the U.S. economy is set to benefit from lower oil prices:

While the EIA projects that the U.S. will continue to see crude production rising next year to average 9.3 million barrels a day, there are already signs of fear and doubt creeping in, from a large pipeline project in the Bakken being shelved to fears of U.S. stripper wells seeing widespread closures (which produced 700 kbpd according to the latest data). The most likely result from lower oil prices is the cancellation of longer-term and larger energy projects, a number of which are already being viewed as underwater:

I could continue my data diatribe, but you get the point. There are so many unknowns swirling around in the current oil market that we have to find solace in the numbers and move forward from there. I defer back to my boss and Elvis: a little less conversation, a little more data.