The USD is benefitting from safe haven flows once again as a lower RRR (required reserve ratio) in China and renewed political uncertainties in Europe are forcing investors into "risk-off" mode. Could this move also be driven by fundamental factors? It has been suggested that the U.S. currency may also benefit, in the medium-to-long run, from improved external accounts, and more generally for the correction of global imbalances. The latest publication of trade data recommends a prudent and patient stance, although Natixis remains bullish on the USD in the medium term.
Among the factors behind such optimism is the oil/natural gas related structural changes that the U.S. economy is facing. However, even though oil product net exports became positive in 2011, the U.S. remains highly dependent on crude imports.
Domestic oil production has risen since its historical trough in 2008 (4.95 m/b/d, the lowest level since 1949) but reached only 5.66 in late 2011. The chart below (left) shows that oil imports continue to make up 1.5 times domestic production.
The surge in oil product net exports comes from the combination of:
- Lower domestic consumption (the ratio of miles travelled divided by the total population); and
- A sharp increase in refinery capacity.
The increase in oil product exports is not the result of a sharp decline in its oil import dependence but the result of a huge excess domestic capacity. The US will remain an oil importer even though their excess capacities in refining activity will help them benefit from the carry provided by the current level of crack spread. This raises two points:
- The historically high level of crude oil inventories in the U.S. is not a reflection of greater independence but the widespread willingness to benefit from the wide crack spread: stocks came out above estimates for seven consecutive weeks last week. A lot of oil is waiting off the Gulf Coast, suggesting that we will see a further rise in oil imports coming into the gulf coast next week. Utilization rates have increased slightly, probably encouraged by higher refinery margins after the fall in Brent prices.
- The convergence of WTI to Brent prices is a reflection of the reversion of the Seaway Pipeline and will probably drive WTI to realign with global prices. The impact on overall gasoline oil prices will be limited as gasoline prices are linked to Brent, not WTI. As can be seen below, the widening of the WTI/Brent spread has been followed by a break of the correlation between RBOB gasoline futures prices and WTI. The only impact would be on midland end-users. Even though the WTI/Brent spread benefits refiners, midland end-users paid the cheapest gas prices against their coastal counterparts.
The case for a stronger USD is genuine (global rebalancing, U.S. manufacturing recovery…), but the positive balance in oil product trade will not hide a long-lasting dependency on crude oil imports.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.