The U.S. energy industry has taken its role of savior of Europe seriously. After boosting LNG exports to a record because of Europe’s thirst for energy, oil exports from the U.S. are now on the rise, as well, but the trend may not be sustainable. Reuters’ John Kemp wrote in a recent column that the United States became a net exporter of crude oil and fuels last month, with the difference between imports and exports at 3 million barrels daily. He also noted, however, that a lot of this oil was coming from inventories that had now fallen to the lowest since 2008.
Since July 2020, Kemp noted, U.S. oil inventories had declined by 421 million barrels. Strategic oil reserves are also low, and fuel inventories are below the average for this time of the year, especially in distillates, which are 30 million barrels below the average.
From an immediate perspective, the fact that the U.S. is stepping in to fill the gap left by sanctioned Russian oil is good news for both U.S exporters and European importers. In the longer term, however, the plan may hit an inventory wall.
If U.S. exporters are dipping into their reserves to send enough oil to Europe, this means that U.S. oil production is not rising fast enough–a fact the Biden administration has been lamenting for some time.
Higher exports that do come from inventories may become another issue the administration finds problematic, particularly in the wake of a ban on oil exports that was proposed by Congressional representatives to keep the reins on retail fuel prices before Russia’s invasion of Ukraine. Now, prices at the pump are even higher than they were in December when the legislators proposed the ban.
Clearly, a ban now would go against the administration’s repeatedly stated and demonstrated support for Europe’s energy needs. Yet, the link between rising U.S. oil exports and rising prices for fuels at home is difficult to overlook. The key, of course, is ensuring that production catches up with demand, which will be even more difficult.
The latest monthly production data from the Energy Information Administration (EIA) revealed that oil output in the U.S. dipped in February, before Russia launched its war on Ukraine. Since then, production may have increased to some extent, but not everywhere.
The Wall Street Journal reported last week that oil drillers in the Permian, the biggest contributor to production growth across the nation, were struggling with persistent shortages of equipment, workers, and, perhaps surprisingly, cash.
Citing energy executives and analysts, the WSJ’s Colin Eaton said that while the Permian was expected to be the only place in the U.S. where oil production could grow significantly, this growth might not materialize as expected because of continuing supply chain snags.
One reason, according to Eaton, is the damage that the oilfield service industry suffered during the pandemic, which prompted companies to mothball a lot of equipment that is now apparently slow to come back online.
Another reason, according to the WSJ, is continued skepticism among investors about the oil industry, despite the rallying prices. This is basically clipping the wings of oilfield service providers who lack enough cash to invest in more equipment in response to higher demand for it.
The situation could prove problematic for both the U.S. and Europe. The chances of large public oil companies suddenly changing their minds and doing what politicians want them to do—stop buying back stocks, suspend dividends, and boost production—are slim to nonexistent.
The chances of smaller independent producers suddenly finding the money to drill as much as is necessary to restore balance in international oil markets may be slightly greater, but still too small: investors take time to change course, and then it takes time for oil production to begin growing.
According to the EIA, U.S. oil production will grow by some 8% this year from last, to 12.6 million bpd. That would be up from an estimated 11.9 million bpd as of the week to April 22, so the increase will be less than 1 million bpd. Europe needs more than that and there are few producers as friendly as the U.S. However, the U.S. will need more crude, too, if only to replenish its inventories at some point.
The situation is likely to remain complicated for quite some time. It is no coincidence that Treasury Secretary Janet Yellen warned the European Union last month to tread carefully when it came to an oil embargo on Russia because that would raise prices for everyone. Despite the warning, the EU is soldiering on with its embargo plan, which could be announced as soon as this week.
By Irina Slav for Oilprice.com
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