Lower U.S. Crude Exports To China Could Pull The Rug Out From Under Oil Bulls
Summary
- 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 $0.60/bbl. The ORB is heavily weighted for crude sales to Asia and is therefore a valuable indicator of relative prices, and 60% of the gain in U.S. crude exports during 2017 were destined for China.
Conclusions
Energy Select SPDR ETF (NYSEARCA:NYSEARCA:XLE) fell 2.3% today and plunged 10.8% in February, its worst monthly performance since December 2015. If crude exports drop as I expect, larger crude oil stock builds are likely for March. That, in turn, is likely to pull the rug out from under the long-only oil bulls. I will re-enter the market from the long side once the fundamentals are more favorable.
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Comments (42)
An big economic slowdown having an effect on global demand is the only threat to a very bulllish senario. US shale growth expectations are so high that it can only disappoint from now. Lets see but facts and global storages dont lie and ultimately fundamentals always win.
I see WTI trading above 85$ 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.
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
