- It was a great year for the U.S., with the triumphant Olympics in Los Angeles and the confirmation of the Reagan Revolution in the November elections.
That number struck me this week as I was reading the Energy Information Administration's weekly petroleum status report. The U.S. exported 1.9 million barrels of oil per day in the week ending Sept. 29, by far a weekly record. Of course, crude exports from the Lower 48 have only been legal since Dec. 18, 2015, so that's not a huge sample size, but the 1.9 million barrels per day (mbpd) figure did represent a 33% increase over the prior week's figure and a 53% increase over the trailing four-week average, so it was certainly a statistically significant change.
So, my first thought was: Is this it? Is it really happening? Is this the culmination of President Trump and Energy Secretary Perry's strategy to transition the U.S. from energy independence to energy dominance?
It's a nice one-week data point, but probably not. The fact of the matter is that weekly export figure had spent most of 2017 in a range of 500,000 to 1 million barrels per day, with occasional spikes to 1.2 mbpd. An exogenous change in the trade balance of such a liquid commodity as crude would happen over months and perhaps years, not weeks. So, we're looking at a trading phenomenon, not a shift in underlying fundamentals.
The key driving factor in growing demand for U.S. exports has been a widening of the spread between West Texas Intermediate crude and crude priced at the benchmark location of Brent, Scotland. Without attracting much attention, the WTI-Brent spread widened considerably this summer. As of last week, that spread had exceeded $8 per barrel, the highest since February 2014. It's easy to forget now, but in late 2013 and early 2014, that WTI-Brent spread was routinely above $10 a barrel. The shale revolution was just kicking into high gear, and traders betting the U.S. would not be able to provide marginal barrels of oil (thus making Brent relatively more valuable) were sorely mistaken.
This year's stealth rally in the Brent-WTI spread was caused by three factors, in my opinion:
- Exchange rates: The dollar strengthened dramatically vs. the euro in the January-August period, but that trend reversed in September. Brent and WTI are both priced in dollars, but the countries that are importing oil have to buy dollars in their home currencies, so a period of "King Dollar" makes WTI crude more expensive (and thus less attractive for a foreign buyer) than Brent, other things being equal.
- Brent crude often carries a "conflict premium" that we just don't have here in the States, as our last major domestic war ended in 1865. Reports of a Turkish blockade of Iraqi crude as a result of the overwhelming vote for independence by the people of Kurdistan have not yet come to fruition, and the situation in Libya has stabilized in recent weeks, especially around the key El Sharara field.
- Domestic demand: There was a feeling among some traders that the damage from the recent U.S. hurricanes would impact refinery capacity enough to lower overall U.S. demand. While that has not happened -- in this week's EIA report total products supplied increased 1.9% , a very strong figure vs. recent averages -- that feeling of hurricane deprivation did contribute to WTI's underperformance vs. Brent in early September.
So I am guessing the surge in U.S. exports is not a sustainable move toward a globalization of U.S. oil output, merely a statistical aberration. If I'm wrong, the way to play more seaborne crude is through crude-tanker shipping companies. Regardless of the sustainability of the jump in U.S. oil exports, total global seaborne crude volumes are increasing and these companies -- Frontline (FRO) is the biggest and Nordic American Tanker (NAT) , Euronav (EURN) and Navios Maritime Midstream (NAP) are my favorite names -- are ridiculously cheap on a price-to-net asset value basis anyway.