While the main event this weekend was the latest OPEC+ meeting which saw member states of the oil cartel and their allies scramble to promise that oil production will be cut if oil prices continue to drop due to excess supply now that Iran’s oil exports may rebound thanks to waivers granted to its main trading partners by the Trump administration, a just as important event to take place was the news of record oil production levels in North America.
Helped by higher prices, total oil production has hit a record level in the US, reaching a combined 15.9 million b/d (crude oil and NGLs) in the past month and almost 2mn b/d above last year.
This number is broken down into 11.35mn b/d of crude oil and 4.57 mn b/d of natural gas liquids (NGLs). As a reference, the US will likely consume about 20.7mn b/d of oil and other liquid fuels in 2018. The surge in US and also Canadian output has pushed total North American crude production volumes above 20 mn b/d.
The larger-than-expected surge in North American oil volumes has come primarily from the Permian, Canada’s oil sands, and more recently, the Gulf of Mexico.
In contrast to the fast growth experienced by its Northern neighbors, Mexican oil output continues to fall as the effects of the latest energy sector reform have yet to be translated into output.
Notably, this surge in North American oil production is only set to accelerate, and according to Bank of America forecasts US crude oil volumes alone will exceed 12MM b/d in 2019. It is this sky high production in the US, coupled with incremental barrels coming from Saudi Arabia and Russia, that together with the Iran wildcard is starting to impact oil market balances. As such, crude oil inventories are starting to increase once again and has led to the recent bear market in oil prices.
Of course, as anyone with a passing interest in the energy sector knows, the faster than expected growth in the US, coupled with more barrels coming from Saudi Arabia and Russia following a challenging meeting last July, is starting to impact oil market balances. For starters, crude oil inventories in the US are starting to increase once again on the back of surging North American output and refinery turnarounds. Meanwhile, there is a risk that total OECD oil inventories may follow suit on the back of the surge in OPEC+ volumes.
This reversal in US and global inventory trends has seen a sharp impact on the market, with near-term indicators of real-time market balances such as front-to-third month spreads in Brent and WTI have fallning back into contango as BofA shows in the chart below (Chart 9). Meanwhile, longer measures such as front-to-thirteen month contracts are following suit (Chart 10), a shift that could set OPEC+ into motion to potentially reduce output volumes heading into their upcoming December meeting, unless of course Trump tweets out a few more warning threatening to intervene if OPEC dares to cut production. That said, OPEC has worked long and hard to rebalance the market in the past two years, and it will hardly be threatened by some jawboning by the US president.
But the biggest surprise from the recent data, and the biggest threat for OPEC is something different, the same thing that according to Bank of America could make the next OPEC price war a lot more costly to the cartel just as the US has continued to isolate itself from global oil price swings.
The reason: as of October, the US is now energy independent for the first time, which is a seismic change considering that just 10 years ago, America was spending 3% of GDP buying foreign energy in 2008, but its energy trade balance is now positive.
And, as BofA calculates, “whether measured in in BTU/oil barrels equivalent or in US dollars, we estimate that the reversal in energy balances from a deficit into a surplus happened in October 2018.”
That said, an perhaps something for the administration to consider, is that on the flip side, the marked improvement in US energy trade balances has been met with a major deterioration in the non-energy trade balance, as a strong US economy and has led to increased demand for foreign goods.
Still, with great energy independence comes great international interdependence.
Consider that in just 10 years, America flipped from being a huge energy importer to becoming the largest exporter of petroleum products in the world (Chart 13). On average, US petroleum product exports averaged 5.1 mn b/d in the past quarter mostly on a combination of gasoline, diesel and residual fuel. In addition, the US is on track to become the largest NGL exporter too (Chart 14). Currently, America runs the world’s largest NGL exports, followed by Saudi and Qatar, thanks to surging ethane, propane and butane export volumes.
The good news, is that as of this moment, the US oil independence has led to soaring US energy trade. According to Bank of America, America has been exporting increasingly larger volumes of crude oil to many countries, with levels recently topping out at around 2.4 mn b/d in the past few weeks (Chart 15). In fact, US crude barrels have recently reached places as far as South Africa, Indonesia and Oman, highlighting the increasing appetite for US light sweet barrels.
It’s not just crude: LNG exports are also finally picking up steam as trains come on line (Chart 16). Total export levels now average 2.95 bcf/d or 0.45 mn b/d of oil equivalent and are poised to keep growing over the next 18 months.
The flipside: whereas the booming US energy sector is now contributing billions to the US trade surplus – even as the overall US trade deficit soars – any additional alienation of OPEC could result in another 2014-type fallout, in which the OPEC cartel effectively dissolves itself and it becomes every oil exporter for themselves as they once again scramble to recapture market share lost to US shale. As a result of such an outcome, oil prices could crater as low as $20 once again, crippling shale producers, but also resulting in another emerging markets/petrodollar crisis.
What could catalyze this outcome? More tweets such as this one:
Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!
— Donald J. Trump (@realDonaldTrump) November 12, 2018
Meanwhile, going back to OPEC and its next steps, the surge in US production means that with oil prices falling by 20% from the highs in recent weeks, the next OPEC+ decision will also have to factor in: (1) the massive 2+MM b/d YoY surge in US output and (2) the negative demand impact of the ongoing trade tensions.
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