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What’s Wrong With The U.S. Oil Export Boom

US shale

The lead editorial in Friday’s Wall Street Journal was pure energy nonsense.’

Lessons of the Energy Export Boom” proclaimed that the United States is becoming the oil and gas superpower of the world. This despite the uncomfortable fact that it is also the world’s biggest importer of crude oil.

The Journal uses statistical sleight-of-hand to argue that the U.S. only imports 25% of its oil but the average is 47% for 2017. Saudi Arabia and Russia–the real oil superpowers–import no oil.

The piece includes the standard claptrap about how the fracking revolution has pushed break-even prices to absurdly low levels. But another article in the same newspaper on the same day described how producers are losing $0.33 on every dollar in the red hot Permian basin shale plays. Oops.

The main point of the editorial, however, is to celebrate a surge in U.S. oil exports to almost 1 million barrels per day in recent weeks. The Journal calls lifting the crude oil export ban that made this possible “a policy triumph.” What the editorial fails to mention is that exports actually fell after the ban was lifted, and only increased because of Nigerian production outages (Figure 1).

(Click to enlarge)

Figure 1. U.S. Oil Exports Have Increased As Nigerian Production Has Fallen. Source: EIA and Labyrinth Consulting Services, Inc.

Tight oil is ultra-light and can only be used in special refineries, most of which are in the U.S. It must be deeply discounted in order to be processed overseas in the relatively few niche refineries designed for light oil. That’s why Brent price is higher than WTI.

It must also displace other light oil such as Nigerian Bonny Light. Civil unrest in the Niger Delta region interrupted oil output and provided a temporary opening for U.S. ultra-light to fill. Nigerian production is now increasing so look for U.S. crude exports to decline. Related: Déjà Vu: Shale To Kill Oil Prices Once Again

Backwardated oil futures prices are another factor that favored oil exports. Since the OPEC production cuts were finalized in late November 2016, the value of futures contracts has been lower than spot price. That encouraged selling at a discount to avoid even bigger losses in coming months (Figure 2).

(Click to enlarge)

Figure 2. WTI Futures Moved Into Contango in June, 2017. Source: CME and Labyrinth Consulting Services, Inc.

Since early June, however, oil futures have returned to contango. Longer-dated contracts have more value than spot prices---so the fire-sale incentive to sell is over.

Friday's editorial goes on to also rejoice in the rising tide of potential U.S. natural gas exports. This is taken by the editors as further evidence that free markets do the right thing. Perhaps they haven't noticed that international LNG prices crashed along with oil prices, and that U.S. gas prices have almost doubled in the last year.

Asian gas demand is saturated and the price for LNG in Europe is only $4.80/mmBtu. The Journal extolls Energy Secretary Rick Perry's approval of more U.S. LNG projects in April but a Wood Mackenzie analysis concluded that "the numbers proposed far exceed what the world realistically needs."

The newspaper has fallen into the trap of mistaking production volumes for profit.

Shale gas and tight oil companies have shown consistent negative cash flow since the shale revolution began. Investors continue to pour capital into them in their desperate search for short-term yield in a zero-interest rate world.

The Wall Street Journal believes that the expansion of U.S. oil and gas exports demonstrates the wisdom of free markets. I think it shows just the opposite.

By Art Berman for Oilprice.com

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  • Ness on June 19 2017 said:
    Finally someone that write about shale and all its smoke and mirrors. Once Wall Street stops allowing them to print shares and they run out of assets to sell then what?

    People mistake income statements and cash flow statements. Retail still gets fooled by income statements but smart money has seen thru it all. Hence the 50pct drop in some of these shale companies prices

    But hey keep pumping
  • Bob on June 19 2017 said:
    Leave it to Berman to always provide the correct perspective. He's the only one who asks the real question: what sense does it make to export while we're importing close to 7 million barrels per day.
  • Gina on June 20 2017 said:
    This article accurately criticizes the WSJ article, but to make the leap that this all proves "just the opposite" (that free markets don't always do the right thing) is illogical. For one, it is difficult to imagine that plentiful supply and lower energy prices are not, in sum, good for society. Abundance might hurt some industries that profit most when oil/gas prices are high, but that is not bad for consumers and society.
  • Matt on June 21 2017 said:
    Good article. In August, there will be 73 million acres put out for oil and gas leases opening the entire GOM to oil and gas exploration. Currently there are 16.9 million acres under lease. This expansion of leases offered by the Department of Interior is the largest in history. This is the affects of President Trump's promise to break OPEC as a cartel. He hasn't strayed from any of his promises, and this was an has been a priority of his agenda, right, wrong, or indifferent.

    Your article makes a great point. As long as there are market cheerleaders hoping to make a buck of of IPO's, stock offerings, and trading, this will continue to be fools gold for those investing in the energy sector. We will have cheap oil for some time now, with the intent of breaking the back of OPEC.

    The most troubling aspect of this energy boom and pending crisis is the overstock of the global fleet of oil tankers. The global fleet stands at 10,102 tankers with a capacity of 4.6 billion barrels of oil. One company, which tracks the floating storage at about 100 million barrels is very troubling. What is going on with the other 4.5 billion barrels of storage capacity?

    The United States, which uses 23 percent of oil, can be supplied with roughly 145 oil tankers. If the US can be supplied with that many, it stands to reason that the entire global market could be supplied with 600 oil tankers. That leaves the excess capacity of the global fleet at 9,500 oil tankers.

    It would stand to reason that these excess tankers are monetized and on the balance sheets of the global shipping companies as assets and monetized through our banking system. That is close to 250 billion dollars of assets sitting on the books. If these tankers are loaded to capacity and are being used as floating storage (see the article last week about a 2 million barrel tanker being turned away from China) then this would be close to another 200 billion dollars.

    In essence, the global fleet of oil tankers (if filled to capacity or near capacity) is a half a trillion dollars of worthless assets sitting at sea storing oil and waiting to offload. This doesn't include the global fleet of offshore oil rigs at about $1 billion dollars apiece.

    We are entering the realm of the TARP bailout now. Essentially, all encompassed, we conservatively have 3/4's of a billion dollars sitting on the shelf. It is no wonder that the rig count has been rising, as these billion dollar assets were parked in a garage for the past two years. The rig counts have just started to rise.

    The consumer will benefit from cheap oil, but this has the potential to be the housing crisis all over again. It will be interesting to see the fallout from this once the energy sector figures it out. This is reminiscent of the 1970's when oil tankers were built and then sent to the recycle bin before a single drop of oil was put in them.

    The ramifications of this "oil boom" are going to monumental. There is a lot of pain in the near future for the banks and companies that have exposure to this looming crisis. This is nothing more than a math problem. We just need to figure out who the weak ones are...and profit from shorting their stock.

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