U.S. oil exports jumped to a record high in February, rising by a whopping 35 percent from a month earlier. At over 1 million barrels per day (mb/d), the U.S. became a larger exporter than a handful of OPEC members, including Ecuador, Gabon, Libya and Qatar.
The U.S. used to prohibit the export of crude oil, a prohibition that was removed at the end of 2015. Since then, exports have inched up bit by bit. But in the fourth quarter of 2016, exports began to surge, a rapid rise that has extended into this year. In February, the latest month for which data is available, U.S. exports climbed to a record high 31.2 million barrels.
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There are multiple reasons for the sudden uptick in exports. First, of course, is the OPEC production cuts. The reduction of Middle Eastern crude has made U.S. oil more competitive in Asia, as the Dubai benchmark – a price that tracks oil from the Middle East – traded at a premium relative to WTI. The Dubai benchmark has sold at more than $1 per barrel above WTI lately, compared to a more than $2 per barrel discount last year. "A very strong WTI-Dubai spread enabled opening in arbitrage opportunities to Asia at a time when there were lots of turnarounds going on in the U.S. Gulf in February," Dominic Haywood, an analyst for Energy Aspects Ltd. told Bloomberg in an interview. Put another way, the reduction of OPEC supply has made room for the U.S. to make inroads in the Asian market.
As China saw the flows from OPEC countries reduce, it turned to the U.S. for oil in February, buying up more than 8 million barrels from American producers, or almost four times the volume that it purchased in January. The OPEC cuts came at a time when China is importing more oil than ever, and the U.S. appears more than willing to fill that need.
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But the high levels of U.S. crude exports probably won’t be permanent, for a few reasons.
First, the spread between Dubai and WTI won’t last forever. U.S. refineries are in the midst of maintenance season, and when more of them come back online and ramp up ahead of summer driving seasons, the flood of oil on the Gulf Coast will be used up domestically rather than exported.
That will lead to lower levels of exports while stepped up purchases from refiners could begin a strong drawdown in the sky-high level of U.S. crude inventories. That, in turn, could provide a bit of a lift to the WTI benchmark, zeroing out any advantage that the U.S. has over Dubai-priced oil.
Moreover, it is not clear that OPEC will extend its production cuts for another six months. Even if it does, OPEC producers are going to return to the market eventually, to great effect. At some point, Saudi Arabia will grow tired of ceding market share to other exporters, and will fight to reclaim customers. Higher U.S. exports “obviously is a challenge for the global market and a renewed threat to OPEC and their designs of keeping prices up," John Kilduff of Again Capital told CNBC.
In fact, just this week Saudi Aramco slashed its prices for light oil heading to Asia, a sign that it isn’t willing to hand over Chinese customers to the U.S. shale industry.
Finally, some broader context is needed. The U.S. is still a net-importer of crude by a large margin. The 1 million-barrel-per-day export level is dwarfed by the 7 to 8 mb/d that the U.S. imports. And because consumption is not going down appreciably, a higher level of exports is arguably being replaced by more imports. U.S. imports for the first three months of 2017 averaged 8.17 mb/d, higher than the 7.87 mb/d the U.S. imported for the first three months of last year. So, while the record high level of exports in February is notable, the U.S.’ status as one of the largest importers in the world has not changed in any significant way.
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By Nick Cunningham of Oilprice.com
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