Oil Prices Touch 2-Month Highs as Record US Exports Drain Inventories

Gains in US oil exports paradoxically resulted in the recent increase in global oil prices due to the massive decline in US crude inventories, which, coupled with Saudi Arabia’s decreased shipments to the US, eased the oil overproduction concerns.

Kristian Rouz – International oil prices reached their eight-week highest on Wednesday after the US crude exports increased to their historic records, and Saudi Arabia decreased shipments to the US.

The rising demand for fuel in North America amidst the summer travel season and higher oil processing activity contributed to the decline in US inventories, yet, oil price sustainability is still shaky as glut fears persist.

On Wednesday, international oil prices advanced toward their two-month highest as oversupply concerns eased amidst the lower US crude stockpiles.

Oil prices extended gains in earl Thursday trading in Europe, but the existing market trends do not provide enough optimism to the oil bulls.

Brent oil benchmark stood at $50.81/bbl on Thursday morning in London, having gained 1.5 percent the previous day and retreated 0.3 percent overnight. US oil traded at $48.62/bbl. Higher US exports unexpectedly contributed to oil prices gains, suggesting that US oil consumption is one of the significant price-shaping market factors, along with oil production in OPEC member states.

US crude stockpiles declined by 7.2 mln bbl in the third week of July compared to the expected decline of just 2.6 mln.

The US is planning to further expand their crude oil exports, with a large oil exports hub, the Louisiana Offshore Oil Port (LOOP), set to start operations in early 2018. The LOOP is conveniently located near the US Gulf Coast oil refineries of Texas and Louisiana, with the Dakota Access Pipeline (DAPL) and Keystone XL delivering shale oil from North Dakota and Alberta.

The rapid expansion in US oil exports in the past 12 months was initially believed to be a downside factor to oil prices. However, the increase in US oil exports in fact contributes to the decline in US crude stockpiles, easing the concerns of the oversupply glut. US crude exports are targeting the expensive energy markets, such as Europe and Southeast Asia, where oil and petroleum products prices are way higher than in the US.
Subsequently, the expansion in US crude exports is seen as contributing to oil prices increase in the near-to-medium-term.

“LOOP is the most obvious place for US crude exports since as a deep-water port it makes it more manageable to load up a large ship such as a VLCC (very large crude carriers),” Sandy Fielden of Chicago-based investment research and management company, Morningstar Inc., said. “It makes huge sense from a logistical perspective as it will allow for more efficient cargo shipments.”

Port of Houston is currently the largest oil-shipping hub on the US Gulf Coast, but when the LOOP commences its operations, it is going to divert a lot of US oil exports from Texas to Louisiana, and also dramatically increase the scale of US oil exports. The US domestic market will, therefore, see an increase in crude price, which will affect oil refinery input costs and domestic petrol prices, adding to the upward pressure on the global oil prices.

Meanwhile, also contributing to the recent increase in crude prices, Saudi Arabia lowered the scale of their shipments to the US, also focusing on the more expensive markets. According to the data by US Energy Information Administration (EIA), by mid-July, US imports from Saudi Arabia fell to their 7-year lowest, to 524,000 bpd. In 2010, US oil demand was significantly lower as the economy was in the early stages of post-Great Recession recovery, meaning that, in the current US oil demand situation, oil prices are going to gains some ground.

Between June and July, US imports from Saudi Arabia have decreased almost twofold, by 450,000 bpd. The trend is expected to continue, which, along with the projected gains in US oil exports, will push US and global oil prices higher. The expected acceleration in the US oil refining and petrochemistry are adding to the bullish oil price expectations.

However, US shale drillers have the capacity to increase their output, even though the highly-volatile situation in the US energy sector hampers the levels of investment and reinvestment.