U.S. Shale And Oil Exports Could Pull Oil Prices Down

Includes: BNO, DBO, OIL, OILX, USO
by: Gaurav Agnihotri


OPEC and US are acting exactly opposite to each other, as far as oil production is concerned.

US oil exports have touched new highs.

US gasoline storage levels are currently at their highest levels since 1990.

In my previous article, I had stated that OPEC and US are acting exactly opposite to each other, as far as oil production is concerned. On one hand, OPEC has managed to achieve a 90% plus compliance levels towards its production cuts. On the other hand, the US oil production is surging at an incredible rate. I had also stated that markets had over-reacted to the bullish statements made my OPEC's general secretary - Mohammad Barkindo. On Wednesday, oil prices went down by around 1.5 %, with WTI and Brent trading at $53.57 and $55.87, respectively at the time of writing this article. In my opinion, the increasing US oil production is the biggest factor that will weigh in on oil prices during this year.

US oil exports have reached new highs

Investor must note that US-based oil producers exported around 7 million barrels of crude oil in the week ending February 5th, 2017. This means that the US-based producers exported around 1 million barrels per day during the same period, which is almost double when compared to its earlier week. At a time when OPEC and other non-OPEC producers like Russia are trying to cut their output by 1.8 million barrels per day, a sharp increase in US oil production and oil exports will nullify the positive effects of oil deal on oil prices.

"We're raising our output and it has more than a parochial impact. It's not so much that it makes the U.S. inventories unwieldy. It's that it adds to the global inventory. That really is the concern in the global oil market. We tend to import the medium and heavy [grades of crude]. I'm sure most of the exports are light sweet oil", said Tom Kloza of Oil Price Information Service. In my opinion, a sharp increase in US oil exports will definitely have a negative effect on oil prices.

Looking at US oil inventories, investors must note that the US-based Energy Information Administration (EIA) will be coming out with its weekly oil market report on Thursday and oil prices will definitely go down if EIA reports another major build up in crude oil and gasoline inventories. Last week, EIA reported a build-up of 9.5 million barrels and 2.8 million barrels in crude oil and gasoline inventories, respectively.

Takeaway for investors

Investors must note that there are several bearish factors that are affecting oil prices at the moment. One is that of an increasing US crude oil stocks. Then, we have a case of rising US shale production. Another issue is that of a rising gasoline glut. As per EIA, at 259 million barrels, the US gasoline storage levels are currently at their highest levels since 1990. In fact, Bank of America Merrill Lynch has recently lowered its forecast for oil (Brent) from an average of $55-75 per barrel by 2022 to $50-70 during the same period. The investment bank further states that oil prices have rebounded because of OPEC-non OPEC oil deal, but factors such as US shale production, a strong US dollar and a price war (between OPEC and US shale) can push down the prices again. In my opinion, oil (NYSEARCA:USO) (NYSEARCA:OIL) (NYSEARCA:BNO) (NYSE:DBO) (NYSEARCA:OILX) may fall below $50 per barrel if OPEC does not extend its oil deal. Moreover, oil prices will again move based on the upcoming EIA oil data. Investors must take note of this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.