The Fuse

OPEC Exports to the U.S. Soar

by Matt Piotrowski | September 07, 2016

Talk of an output freeze among OPEC members and some non-OPEC producers—notably Russia—has dominated oil market headlines of late, with rhetoric alone sometimes pushing prices higher. Producers have given contradictory statements, with pressure for the discussion driven by Venezuela, which is desperate for higher oil prices as the country’s economy hemorrhages. The Saudis and the Russians built up a lot of hype this Monday when they prepared a major announcement about cooperation “Pact” between the two heavyweights. Traders understood this to signal that the two countries had struck an agreement on an output cap, driving up oil prices. Instead, Saudi Energy Minister Khalid Al-Falih clarified that the countries were simply putting together a task force to monitor oil markets and would continue to cooperate on energy issues. “The Ministers agreed to continue consultations on market conditions by establishing a joint monitoring task force to continuously review the oil market fundamentals and recommend measures and joint actions aimed at securing oil market stability and predictability,” stated the text from Russia and Saudi Arabia. The move had no teeth. Oil prices retreated once again.

Although OPEC members are suffering from the lowest net export revenues since the mid-2000s, the group’s woes haven’t prevented it from building market share in the U.S.

Al-Falih has tried to put a good spin on recent market developments, saying that conditions are getting better for producers. “There is no need now to freeze production,” Al-Falih said in an interview with Al Arabiya television in Hangzhou, China. “It is among the preferred options, but it is not necessary today. The market is improving day by day.”

Implementation of a production cap remains unlikely: The Saudis have a longstanding distrust of other members of the cartel because of cheating on quotas in the past. Iran is still upping production in order to return to pre-sanctions levels, while Iraq also has ambitions to pump at higher levels. Nigeria and Libya are planning recoveries in their production. Russia, meanwhile, is not situated to act as a swing supplier and has raised output by about 500,000 b/d since prices collapsed in 2014. Nevertheless, talks are still ongoing and countries are posturing ahead of the meetings, even as the cartel reached record production last month at 33.69 mbd on the back of the Saudis pumping 10.7 mbd. The new OPEC Secretary-General Mohammed Barkindo, for instance, held meetings this week with Iranian President Hassan Rouhani and the energy ministers of Qatar and Algeria.

As OPEC abstains from managing fundamentals, members are suffering from the lowest net export revenues since the mid-2000s. However, the group’s woes haven’t prevented it from building market share in the U.S.

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Exports to U.S. rebound

While OPEC members are indeed hobbled, their strategy of failing to throttle back in order to choke off non-OPEC production has slammed U.S. shale. U.S. production has fallen by more than 1 million barrels per day (mbd) over the past 18 months, creating a supply gap that has been filled with OPEC oil. Not all of the energy security gains from the shale boom have been lost—imports from OPEC are still down 2.3 mbd from their peak in 2008, but current trends are worrisome.

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U.S. production has fallen by more than 1 million barrels per day (mbd) over the past 18 months, creating a supply gap that has been filled with OPEC oil.

So far in 2016, the U.S. has imported some 3.1 mbd from OPEC members, according to the latest revised data from the Energy Information Administration (EIA). That is up from 2.6 mbd during the same period last year, a jump of almost 20 percent. The general uptick in higher volumes from OPEC countries began last spring, around the time shale started declining.

While the Saudis saw modest gains in the past year in the volumes (they’ve kept exports to the U.S. above 1 mbd), the biggest winners have been Nigeria, Angola, Ecuador, and Iraq.

West African producers Nigeria and Angola were the first to see their volumes backed out from U.S. amid the rise in domestic output, since their crude grades are similar to what is produced in the Bakken and other shale formations. For the first half of 2016, U.S. crude imports from Nigeria averaged 218,000 b/d, quadruple the amount shipped during the same time the previous year. Nigeria, which sends most of its U.S.-destined barrels to East Coast refiners, had been virtually shut out of the U.S. market for some time, becoming the biggest victim of the shale boom. The irony with Nigeria is that it has boosted its market share in the U.S. at a time the country is struggling keeping production elevated due to militant attacks on infrastructure.

Despite the uptick, total imports are still about 2.3 mbd, or 23 percent, lower than peak levels reached in 2004-07, the height of U.S. dependence on foreign crudes.

Angola shipped some 158,000 b/d to the U.S. for the first half of 2016, a 66 percent annual increase. Iraq’s shipments to the U.S. rose by 166,000 b/d, or an enormous 83 percent, to 367,000 b/d so far in 2016, a big victory for the country as it has increased its overall production by roughly 1 mbd since early 2015. Ecuador, which sends some 85 percent of its U.S.-bound cargoes to the West Coast, has seen its exports rise by 28,000 b/d, or 13 percent, year-on-year. Venezuela wasn’t able to ship more to the U.S., which is unsurprising given that it produces heavy crude—shale is mostly light, tight oil—and its oil production has declined this year as a result of low prices and its ongoing economic implosion.

Overall crude imports averaged 7.8 mbd in the first half of 2016, a 535,000 b/d yearly increase, meaning almost all of the increases in demand from foreign sources were met by OPEC countries. Despite the uptick, total imports are still about 2.3 mbd, or 23 percent, lower than peak levels reached in 2004-07, the height of U.S. dependence on foreign crudes.

High stakes struggle

More reliance on OPEC is one big consequence of shale producers getting hit by an extended period of lower prices, even though U.S. production has demonstrated much greater resiliency than initially expected. With prices expected to languish through early 2017, shale production could continue to fall. For instance, the EIA sees U.S. output declining by another 300,000 b/d by the third quarter of next year. Against this backdrop, reliance on OPEC imports may continue to rise. It’s unlikely that OPEC will adjust its strategy at the upcoming gatherings in September and November—any action to cap or cut output would erode the progress it has made in restoring exports to the U.S. market.

It’s unlikely that OPEC will adjust its strategy at the upcoming gatherings in September and November—any action to cap or cut output would erode the progress it has made in restoring exports to the U.S. market.

Since prices collapsed in mid-2014, the oil market has dealt with a high stakes struggle between OPEC producers and the U.S. shale industry. OPEC has increased output and seen two old members reinstated. U.S. shale firms, meanwhile, have had to cut output, lay off staff, and declare bankruptcy. Still, the fact that shale has outperformed expectations means OPEC remains hamstrung in throttling back to shore up prices. The next several months will be very interesting in terms of the battle for market share, and should tell us a lot about how the market will shape up in 2017.

 

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