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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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A Unique Opportunity: OPEC Cuts To Boost U.S. Shale Exports

Fracking operations

The OPEC deal to curtail oil output and help drawn down record global oversupply may turn out to be positive for the cartel’s over-reliant-on-oil economies in so much as it is expected to lift oil prices. What OPEC and the non-OPEC nations that cut the production-cut deal have not yet seen coming (or are just too confident it won’t happen) is a possible rebound in U.S. shale output as early as in 2017.

What’s more, experts and analysts see the OPEC/NOPEC deal to take almost 1.8 million bpd off the market in January as leading to lower tanker rates and rising spreads between the U.S. benchmark crude and the Brent or Dubai crude prices. These trading conditions, coupled with the specifics of the U.S. crude variety and the lifted restrictions on U.S. exports, could be the basis for increased American crude oil exports to the oil-hungry Asian markets.

Since the restrictions on U.S. crude oil exports were lifted in December last year, America’s oil exports have been rising and reaching more destinations, data by the U.S. Energy Information Administration (EIA) shows. Between January and May, Japan was America’s third-biggest destination for crude exports, even if volumes were just 17,000 bpd.

The latest available EIA data shows that total U.S. exports reached a record-high in September, at 692,000 bpd. In that month, exports to Canada (traditionally the biggest buyer that has never been subject to export restrictions) and to Europe were strong, but exports to Singapore, for example, jumped to 99,000 bpd from 21,000 bpd in August. Exports to South Korea stood at 59,000 bpd in September.

Of course, these volumes are dwarfed by the global trade volumes and the U.S. imports of crude oil. Related: Rex Tillerson: ‘’Russian Spy’’ Or Diplomatic Genius?

But OPEC’s deal is widely expected to lead to lower tanker rates, which will make it more profitable to ship U.S. oil to Asia, even if the U.S. ports cannot accommodate and load the largest crude vessels and oil needs to be transported first in batches to the supertankers.

The median estimate by eight shipping analysts surveyed by Bloomberg last week showed that a very large crude carrier (VLCC) – a supertanker with capacity of 2 million barrels – would earn an average US$25,000 next year, or 12 percent less than the analysts’ profit expectations before OPEC pledged to cut production. Expectations are that next year the giant supertankers would see their earnings at the lowest level since 2013.

If supply drops as a result of OPEC/non-OPEC cuts, the shipping market would find itself with more vessel capacity than needed. “If OPEC actually institutes their cuts, there’s no doubt that tanker rates are going to fall, especially rates for VLCC rates,” Andrew Lipow, president of Lipow Oil Associates, told CNBC’s Tom DiChristopher.

Rahul Kapoor, director of Drewry Financial Research Services, told CNBC two weeks ago:

“Shipping is a volume game, so higher OPEC production has supported the tanker rates over the past few years.”

So these lower tanker rates may offset the costs for producers to ship oil from the U.S. coast via ship-to-ship transfers to overcome the limitations of the U.S. ports. Oil major BP has recently done so, Reuters reports, noting that while complex, this type of shipping may likely become more popular with OPEC’s cuts in play. Lower supertanker rates may also offset the cost of longer routes toward Asia, because even with its expansion, the Panama Canal cannot accommodate Very Large Crude Carriers (VLCC) or Ultra-Large Crude Carriers (ULCC). Related: Bakken Oil Production Soars After Long Decline

Apart from lower tanker rates, the OPEC agreement is also leading to higher spreads between the WTI Crude and the usually more expensive benchmarks such as Brent Crude or Dubai Crude. All oil prices have jumped since the deal was announced, but the Brent premium over WTI as of early trade on Tuesday was very close to US$3.00.

These ‘external’ effects of the OPEC deal combined with U.S. developments may result in increased American oil exports to Asia.

First, U.S. oil is of the so-called ‘sweet’ variety and is low on sulfur. Even if less energy intensive, it is easier and cheaper to refine.

Second, there’s the U.S. shale patch producers that have grappled with the ‘lower-for-longer’ oil prices but have become ‘meaner and leaner’ in their operations, expenditures and costs. Higher oil prices due to the ‘OPEC-effect’ may help the Middle Eastern economies, but they will also help U.S. drillers bring more rigs online.

Even Continental Resources (NYSE:CLR) – whose chairman and CEO Harold Hamm is also Donald Trump’s energy advisor - is placing South Korea at the top of its list of potential crude oil and condensate export destinations as the U.S. company considers exports.

Surely, U.S. oil export volumes will not be able to compete with Saudi Arabia’s sales in Asia any time soon, but it’s that very same Saudi Arabia – as de facto leader and largest producer in OPEC – that may have offered up an opportunity for increased U.S. crude sales on the Asian market.

By Tsvetana Paraskova for Oilprice.com

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  • Mo on December 15 2016 said:
    Most of the cuts specially from Saudi Arabia will be from US share of imports so the asian Market will not have their shares reduced. The second thing is the US shale production will not increase significantly untill june/july 2017 where I suspect ee will have another supply glut and lower prices.
  • Shailendra Tyagi on December 15 2016 said:
    very lucid article. but i would still want to know what price of crude is required to make shale production viable again. Is it $60/barrel or about $65/barrel?

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