Entering text into the input field will update the search result below

Lower U.S. Crude Exports To China Could Pull The Rug Out From Under Oil Bulls

Robert Boslego profile picture
Robert Boslego


  • First VLCC loaded to carry crude oil to China, as U.S. becomes a leading crude oil exporter.
  • But the trade has become uneconomical.
  • Sixty-percent of the rise in crude exports is due to China.
  • Lower crude exports in the weeks ahead could support crude stock build, undermining oil prices.

On Sunday, February 18, the first Very Large Crude Carrier (VLCC) loaded with U.S. crude oil set sail for Asia from the Louisiana Offshore Oil Port (LOOP). The trade was arranged during January.

VLCC’s carry about two million barrels of oil and are much more economic than smaller tankers. In the past, VLCC’s left the LOOP empty after discharging crude in the GOM.


Image Courtesy: Shipspotting/Lappino

This past July the LOOP sought customer interest in loading services, modifying its facilities to allow the port to operate “bi-directionally” to handle exports. Infrastructure logistics had been the biggest constraint in enabling U.S. crude exports to rise. Trading houses, pipeline owners and ports are reportedly investing in new infrastructure to increase shipments of American crude. These investments are likely to optimize the flows of imports and exports, lowering shipping costs.

But there may be a lull before the next supertanker loads at the LOOP, destined for Asia. The price of the Middle East Dubai marker fell below WTI. The strength of WTI v. Dubai does not justify sending U.S. crude to Asia. Saudi Aramco recently considered exporting crude from its U.S.-based Motiva unit, and concluded the trade is uneconomical. Saudi Arabia also reportedly cut its March exports to less than 7 million bpd due to seasonally soft demand.

The contraction in the spread between the OPEC Reference Basket (ORB) and WTI has become significant. From mid-September through mid-January, it averaged almost $4/b. In the past week, it averaged just $0.60/bbl. The ORB is heavily weighted for crude sales to Asia and is therefore a valuable indicator of relative prices, and 60% of the gain in U.S. crude exports during 2017 were destined for China.


Energy Select SPDR ETF (NYSEARCA:NYSEARCA:XLE) fell 2.3% today and plunged 10.8% in February, its worst monthly performance since December 2015. If

Are You Pleased With Your Energy Sector Returns?

If not, perhaps you should consider Boslego Risk Services, a premium service in Seeking Alpha’s Marketplace. My approach is to go long, short, or be on the sidelines.

I provide a model portfolio which is updated daily. The trades are quickly posted as performed.

Learn more about the service by clicking here. There is an active membership chat room to talk about the oil market and strategy.

The monthly and annual pricing options are described here. You may sign-up for a free 2-week trial. You may also read reviews posted by members here.

This article was written by

Robert Boslego profile picture
Seeking Alpha Marketplace Premium Service: Boslego Risk Services.Managing Director, Boslego Risk ServicesHarvard College, Economics (Honors), BA Undergraduate thesis: "OPEC Pricing Strategy." Harvard Business School Case Study: "Industrialized World and Oil."Stanford University Graduate School of Business, MBA I founded Boslego Risk Services and became a recognized expert in the area of energy price risk management (hedging) and trading, providing oil and natural gas hedging strategies to major oil companies such as Exxon, Shell, Mobil, Chevron, Texaco and Phillips; to the national oil companies of Norway, Venezuela, Mexico, Canada, France and Italy; to major users of energy products, such as Delta Airlines, United Airlines, Burlington-Northern Railroad, and Canadian Pacific Railway.I also provided frequent market assessments and recommended trading positions to major trading firms, such as Enron, Phibro, Sempra and Vitol, and to large hedge funds.As the recognized expert in energy hedging, I was selected by the former president, John Treat, of the New York Mercantile Exchange (NYMEX) to write the chapter on hedging in his book, Energy Futures (1990, 2000).

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (42)

The simple fact of the matter is that the current price of oil does not encourage offshore drilling which accounts for over 40 % of new oil production. This has been the case for over 3 years.
Last year we burnt 30 odd billions barrels but only found 6. Plus depletion of conventional wells continues.

Forget about this shale oil. It is largely a ponzi as evidenced by the over 100 bankruptcies. In any event shale is only a small part of today's oil equation.

As many of the experts say. 'We need all the oil we can get...including shale."
Viking75 profile picture
The continued dollar weakness + the fact that the oil market is now seriously in backwardation will push the oil prices much higher this year and next. Inventories are draining all over the world. It is a fact. And why would not they given the structure of the market at the moment?
An big economic slowdown having an effect on global demand is the only threat to a very bulllish senario. US shale growth expectations are so high that it can only disappoint from now. Lets see but facts and global storages dont lie and ultimately fundamentals always win.
I see WTI trading above 85$ before the end of this year and above 130$ before the end of 2019.
Energy equity will follow but hard to see to what extent given how correlated it is to the global equity (macro) performance (beta). The oil sector will outperform for sure though.
Not sure we will reach 85 this year, but it will go up for sure. Looks like the market agrees that a recession is the only scenario where oil does not go up. Just look at the movement in price of oil during market turbulence in February. Very strong correlation.
crrj profile picture
Im learning, so experts, please help me understand-

1- What is the process of the US becoming more oil independant on our own US oil? What % of production is light/heavier/heaviest?
2 How much do we import? And How much of that oil could we produce and use domestically?
3- Is it because refiners are built to process only foreign quality oil? How long, and how much to "re-tool" to only utilize US produced oil?
4- Who is able to take our US oil when we cannot? Do they have refineries that can refine our light oil?? Do we even make heavy crude?
5- Why do we have so many different fuel grades/regs in different states? Would it not be more cost efficient to just have one reg and supreme blend for all US cars? And can we not have our buddies in canda and mexico join us to be seemless?

If we have an annual trade deficit that runs from $400B-$700Billion annually, why not use THIS ASSET to help reduce? ( I know--environmentalist groups, etc)But-with $25-$100 Trillion of oil and nat gas/coal estimated reserves in US, why can we not develop a 15-20 year strategy to systematically utilize our own domestic fossil fuels and solve much of our deficit issues, create cost advantages over the world for competition? For those environmentalists ( we all want clean water/air and land--fyi) who believe we will end the use of fossil fuels in 20 years anyway, why not DEVELOP/USE/SELL as much of this dying asset class while it still has SOME VALUE? When 8 track tapes went extinct to cassettes, and then discs, and then digital---why not SELL ALL THE DYING INVENTORY while it has value??? And help pay down debt while we transition to wind/solar--whatever renewables??

I LOVE CLEAN LAND/WATER/AIR--But dont we have every environmental group in the world measuring/monitoring air/land/water now--and dont we have the cleanest ever?? And if 20% of ur population is poor or underemployed, so you think they care about the 3 cleans as much?

Anyway--please help me understand
tbone1ct profile picture
The U.S. only began exporting oil in 2016 after a 40 year ban.
Numbers can change in a few days. This is a non event !
Crude stocks will build because that's what they do this time of year. If oil tanks along with stocks I will be buying! Thanks for the analysis Robert. Very professional even though I don't agree with your conclusions.
Robert Boslego profile picture
thanks, Cal for your comment, anyone is invited to disagree, but try to be nice about it like you.
Aventador profile picture
RB I think the rug was pulled out some time ago. Smart money abandoned that trade long ago but you always have the slow to react as evidenced by reading the above.. Only thing we are waiting for is the return of the $50 print on WTI.
Everyone is expecting to wti go back. Even speculators cut their long positions last weeks about 250 m barrels. It is easy trade. If something goes wrong you could see mean reversal.
The shorts have been lulled into believing that the pattern of pain from March until october from last year will repeat itself. This is a spurious view given the change in inventory position versus last year. They will become excited the next few weeks if oil falters. But then when the draws pick back up it will be a bloodbath as prices rise all through spring and summer. This reminds me of Feb 2016 when sentiment was so bad and people were still shorting oil at 30. They crunched numbers, forecasted, proclaimed the death of OPEC, then lost their shirts. Same will happen again.
I think that's why Robert gives buy AND sell AND hold signals.
World inundated with crude? I must have missed that. My understanding was that demand has outstripped supply and storage is at the 5 year average. In spite of the universally hated shale e&p's. VLCC import heavy crude VLCC export gasoline and condensate. If not I agree a gas glut is coming. Saudis don't care the world needs heavy crude.
Extremely erratic trading by oil today. Usually signals a bottom. Believe a lot of retail exited their positions today...Nice to se oil decouple from the equity market, at least to some extent. This could be the great rotation day. Out of Tesla, into oil stocks.
MichelleConnor profile picture
Robert B.,

Your last bearish article ("A Flash In The Pan") hit the short-term bottom. I am not sure of the outcome of this article.
Robert Boslego profile picture

I wrote about oil prices "going to hell in a handbasket" over the first weekend of Feb, and it was the worst monthly performance since Dec 2015 for XLE.

With the steel and aluminum tariffs announced just now by the "stable genius," expect retaliatory announcements soon, but more quiet withdrawal from buying U.S. crude stock. With the world inundated with crude, I expect those against whom we impose tariffs (certainly China) will simply take their business elsewhere. All of this trade turmoil for a "sound bite" heard only by his limited core constituency in what was once steel country, PA.
It's funny to hear that in today's globalized world, someone believes in these old-fashioned methods about taxation and tariffs. If the price will be right that product is going to be imported one way or another. Someone is going to buy it from china and sell it further.
Its not just a matter of pricing. China has long overproduced alley and secondaries purely for political reasons and tries to dump the volume at a loss in the US. The US is a huge market for alley, so its not as simple as China can just sell it elsewhere at a different price. This is a good move, China needs a slap
It will be what it has to be but in my opinion it will have a negative mid term impact on the plan to rebuild infrastructure and further expansion of oil production.
Mike_Frenchie profile picture
Robert, i guess that you know that most of the new shale oil has an API above 40 and is useless for making diesel and kerosene (but perfect gasoline)... not to mention that it must be blended (most of the time) with some uncertain outcome (quality wise - a recent BBG article underlined this quality issue) to the point that the WTI contract had to be rewritten to guarantee quality..

Until end of November, only Europe and Canada were buying shale oil (dixit Morgan Stanley) and they are likely not interested in more (ceiling reached). China is new and may take some if prices and needs justify (let's remember that most Chinese refineries are geared for heavier grades coming from Russia and Middle East).

Since US is draining its heavy oil inventory (Cushing) at record speed (28 million bar. left - three/four months at current draining speed) and replacing them by LTO - the US is soon going to swim in gasoline/LTO/NGL/conde... and will be short of heavy oil.

People have argue here that "then the whole oil market will go down" but this is unlikely, heavy grades will perform well (CAPEX cut, etc.) while light grades will face serious discount (shale bringing more and more of it).

Not all barrels are equal...
It's not "useless for diesel". There is still an appreciable fraction that is diesel and jet but just not as much. And most of the difference is in conversion of the heavier fractions, not in straight run cuts (which requires capital).
Mike_Frenchie profile picture
I was meaning "useless " economically. I am following some refiners/chemists on Twitter or here and they all agree that LTO is not the fuel of choice for making diesel or jet. but you are right, refiners can do it - but why should they if it is non competitive!
That twitter refiner crowd has had a lot of mistakes (NGL 914 conspiracy, CLR financials, etc.)
I guess those VLCCs coming with crude to the US will need to be directed to China instead. That means less imports to the US and less exports. The net is the same. Only shale will find it more difficult to sell its high API stuff.
I would really like some analysis of the LOOP situation. Seems strange that they would load medium sour from the GOM onto a ship that just deposited something very similar to that!

Wonder if they were just testing the pumping capability. Wonder if the pipes and tanks will support bidirectional flow (LTO out, sour in)? Or even back and forth flow (but then what is the line fill volume)?
Randy W profile picture
Dear 21703061, I'm confused. We haven't seen much detail from LOOP. The line fill volume is significant, so unless they did some pipe work, they will have some cross contamination. It does make sense to export lighter crude. We can't forget that BIG ships mean lower freight costs. This makes about as much sense as a Federal Judge trying to stop the Bayou Bridge Pipeline.
Spread of WTI Cushing to world prices moved because of Diamond Pipeline. The issue was internal to the US: WTI Cushing to WTI Houston (or LLS) spread.
We’ll see. Oil prices turn on a dime for any number of reasons.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About XLE

SymbolLast Price% Chg
Expense Ratio
Div Frequency
Div Rate (TTM)
Yield (TTM)
Assets (AUM)
Compare to Peers

More on XLE

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.