Are U.S. Oil Exports Really Unstoppable?

Earlier this year, when U.S. crude oil exports hit a record 2.2 million bpd, the figure was hailed as the beginning of a new era that could eventually see the world’s top consumer—and top producer for this year so far— export up to 4 million bpd. Some believe that nothing short of a sharp price spike can interfere with the bright future of U.S. light crude. Indeed, if fundamentals were the only factor at play, that would be the case. Alas, there are more factors that can affect the future of the United States as a major oil exporter.

First, it’s worth noting why exports are growing. It’s not just because of the shale boom. It’s also not only because of the lifting of the oil export ban from the ‘70s. An important reason for the jump in U.S. crude oil exports is the fact that, as Houston Chronicle’s Rye Druzin noted in a recent story, a lot of U.S. refineries are simply not equipped for processing the light crude. They need heavier grades, hence the still existing demand for Canadian and Venezuelan oil, which is heavier than the light crude pumped from the Permian.

Refiners could invest in new facilities that can process light crude, but it is a large undertaking. Still, Chevron is doing it, although, as Druzin points out, it might be the exception. For most, exporting the crude they can’t absorb in the refineries is the preferred option. So, this means exports are set for a rise whatever happens, right? Wrong, of course. There is no such thing as “whatever happens.”

The clearest sign yet that U.S. oil is not yet ready to take over is China’s zero U.S. oil imports in August. Local refiners apparently decided to be cautious amid the deepening trade row between Washington and Beijing, and perhaps see if they can make do without U.S. crude. They did make do: total Chinese oil imports in August went up by 6 percent, hitting a three-month high.

The reason China is important is that as of July 2018, it was the second-largest buyer of U.S. crude after Canada. It took in 23 percent of total U.S. oil exports last year and 22 percent this year until August. That’s more than a fifth of total exports and, truth be told, the receiving country mix is not that great without China.

Sure, U.S. producers are exporting to Japan and India as well, and India is a top importer of crude. But India is also having trouble with its oil bill already, and U.S. oil will be hard pressed to compete with Middle Eastern crude, which is simply a lot closer to India, and hence cheaper.

South Korea is also a buyer of U.S. oil, and it has a stronger economy than India and could therefore afford costlier U.S. crude for a while, especially after it cut its imports of Iranian oil to zero in anticipation of a pat on the head for complying with Washington’s request for Iranian import cuts to zero. Japan is a staunch ally and a major oil importer, so that’s good for U.S. exporters, too.

Some European countries, notably the Netherlands, the UK, and Italy, and to a lesser extent France and Denmark, are also buyers of U.S. crude, but the amounts they need are too low to spur a true export boom. In fact, Morgan Stanley warned about this earlier this year, before the U.S.-Chinese trade spat grew into a heated conflict. The prospects of oil demand growth in Europe are “modest at best.”

 

On top of it all, the new emission rules of the International Maritime Organization will spur demand for heavier crude, and U.S. shale producers may be forced to discount their crude to enhance its competitiveness. Or maybe some of them will start investing in local light crude refining capacity. After all, the U.S. is the largest oil consumer globally.

hmm.. maybe the Trump administration with all it's BIG OIL ties will get on with solving this China trade riff.. a little quicker now.. given that it's the largest outlet for rising US Crude Oil Production..??