RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

U.S. oil exports have moved up in recent weeks, up-ending the trade flows. While that may be good news for some of the U.S. drillers, the unusually high level of crude exports is not a great sign for the health of the oil market. At the same time, it is not guaranteed that U.S. producers will be able to continue to ship oil abroad at such a high rate for too much longer.

U.S. oil producers were prohibited from exporting crude oil for decades until Congress scrapped the ban in 2015. For much of last year, exports only rose slightly. That changed in 2017 – U.S. crude oil exports topped 1 million barrels per day (mb/d) several times in recent weeks, double the rate from a year earlier.

The exports have provide an outlet for shale drillers but they also put pressure on the global oil market. In the past, the export ban would have meant that U.S. shale drillers would have had to suffer through a glut and cut back on production. Now, they can continue to ramp up and export the gains. Without the ban, shale drilling and production are both rising quickly. The EIA now expects the U.S. to break its all-time production in the near future, and average 10 million barrels per day next year.

However, one of the major reasons why exports are rising is because of the discount that WTI trades at compared to the more internationally-oriented Brent benchmark. WTI has often sold for several dollars per barrel less than Brent, making it much more attractive for buyers. Thus the surge in exports this year.

But as buyers turn to American crude, the WTI benchmark is set to converge towards Brent, shrinking the discount. In fact, that is already happening. The WTI-Brent discount shrank from nearly $3 per barrel in May to less than $2 per barrel more recently.

As the discount narrows, U.S. crude will lose a bit of its competitiveness compared to other producers around the world. That could put a ceiling on the growth of oil exports – in the most recent data, the EIA reported a fallback in crude exports to just 557,000 bpd for the week ending on June 2.


Jul ’17 Crude Light Daily Chart

Crude Light Daily Chart

Tim Haberkorn