It’s no secret that OPEC’s decision late last year to cut production has infused uncertainty and volatility into the oil markets. Since the agreement, OPEC’s focus has in particular been on the U.S. market in order to gauge the success of its actions. The cartel did not want to see a sharp recovery in shale and it wanted to squeeze U.S. crude inventories. Now that the EIA has released its final data for March, a clearer picture has emerged about the early effects of the cut. Throughout the first quarter, U.S. shale output saw healthy gains, crude exports skyrocketed, imports from OPEC actually increased, and crude inventories rose—all of which call into question the effectiveness of the cut.
Throughout the first quarter, U.S. shale output saw healthy gains, crude exports skyrocketed, imports from OPEC actually increased, and crude inventories rose.
However, even though the U.S. has been resilient in the face of the cartel’s actions, the OPEC production cut is still ongoing so the final result of its effects is far from certain. In fact, U.S. crude inventories have fallen for eight straight weeks, declining by a sharp 6 million barrels last week, an indication that OPEC’s strategy may eventually work in its favor. Still, analysts diverge on the future impact of the cut and whether the cartel and its non-OPEC counterparts have an effective exit strategy once they unwind the agreement that has taken 1.8 million barrels per day (mbd) off the market.
For the first quarter, total U.S. crude production averaged 9 mbd, up by almost 200,000 barrels per day (b/d) versus Q4, but they were still some 171,000 b/d lower year-on-year and almost 500,000 b/d under Q1 2015 levels.
With domestic production rising and OPEC reducing sales to Asia, the U.S. has taken advantage of shifting market conditions by shipping more crude to customers overseas. The U.S. exported an eye-opening 900,000 b/d of crude during the first quarter, with volumes going to 24 different countries, compared to exports of 510,000 b/d in Q4. Exports were more than double levels seen in Q1 2016. The numbers have fluctuated sharply month-to-month, but Canada and China were at the top of the list of buyers. Besides sending 175,000 b/d to China in Q1, U.S. sellers also upped their volumes to other Asian customers, including South Korea, Singapore, and Japan (see below for the breakdown for March).
It’s ironic that, even with OPEC throttling back, crude imports from the cartel rose in the first quarter. They averaged 3.37 mbd, compared to 3.2 mbd for Q4 and up from 3 mbd during the same time a year ago. Saudis led with volumes to the U.S. averaging 1.29 mbd, up 28 percent from Q4 even though the Kingdom slashed output by more than 700,000 b/d during that time period. Analysts had expected imports from OPEC to decline because the cartel is seeking to reduce OECD inventories, in particular those in the U.S., where inventory draws have an outsized effect on trader sentiment and prices. After the OPEC meeting last week, Saudi Energy Minister Khalid al-Falih said that the Kingdom planned to reduce volumes to the U.S. for the second half of the year, but it’s unclear whether the market believes him. High imports from OPEC at the beginning of this year might have been mostly the result of elevated production in Q4 ahead of the deal—so it remains to be seen whether volumes to the U.S. will fall throughout the year. Preliminary data for April and May show total crude imports holding steady just above 8 mbd.
It’s ironic that, even with OPEC throttling back, crude imports from the cartel rose in the first quarter. They averaged 3.37 mbd, compared to 3.2 mbd for Q4 and up from 3 mbd during the same time a year ago.
The oil price selloff since the OPEC meeting, coupled with shale’s rebound and the cartel’s continued commitment to cuts but lack of an exit strategy, has fostered greater uncertainty in the market. The latest data in the U.S. reflects the contradictory impact of OPEC’s strategy. A number of critics argue OPEC is destined to fail in its market management, which threatens another price fall. Others see fundamentals tightening throughout the rest of the year. Expect analysts to remain all over the map on the effects of OPEC’s actions.