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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Oversupply Fears Grow As U.S. Oil Exports Hit Record High

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U.S. oil producers contributed a record 7 million barrels of crude oil to international markets during the Week of February 5th, 2017, approximately one million barrels per day. This is on the tail of OPEC strategically limiting their global contributions. These OPEC supply constraints are a continuation of policy agreed upon in January by OPEC nations and other suppliers to support higher prices.

Some analysts speculate that this is a harbinger of continuously increasing American activity in the global oil market. However, it remains unclear if this level of output is sustainable in the long-run. The U.S. daily average in the preceding four weeks was a less advantageous 685,000 barrels per day. This increase from U.S. shale producers is a comeback from idle operations during last year’s market downturn. The bulk of the growth originates from Permian shale, a type found predominately in Texas.

This increase has also given rise to short-term supply concerns, as too sharp an increase will lower prices. Brent crude oil, for example, dropped 0.4 percent in price on Wednesday, February 15th following a report from the American Petroleum Institute that North American oil production is steadily increasing. In addition to this data, the Energy Information Administration reported record numbers for U.S. oil stockpiles and gasoline inventories, at 518.2 million barrels and 259.1 million barrels, respectively.

China seems to be one of the bigger destinations for this American oil, possibly due to the gaps in supply that the other large oil producers are creating. For example, PretoChina and Unipec both chartered 2 million barrels. Additional export destinations for U.S. oil include Europe, Latin America, and Canada. Related: Is Big Oil Underestimating Autonomous Vehicles?

These spikes in shale production are in line with U.S. government estimates, the latest of which predict an increase of 80,000 barrels per day during the month of March – the third month in a row of increasing shale supply. Last week, total production of oil in the U.S. was just under 9 million barrels a day. This is perhaps a function of oil prices having stabilized above $50 a barrel, making production of shale in America more profitable. The forecast concludes that overall oil production will reach 9.5 million barrels per day by next year.

There are some disclaimers with the heightened numbers from this past week however, all of which question whether this uptick is sustainable or not. Firstly, a potentially large percentage of the 7-million-barrel shipment from the U.S. could be headed to Singapore due to pricing arbitrage, not a stable increase in demand. Furthermore, analysts were quick to point out that the recent fog clouding the Houston Shipping Channel may have delayed cargo shipments, resulting in congestion and artificially heightened numbers for last week.

Despite these possible sources of inflation, analysts as well as OPEC itself remain optimistic. The increase in oil pipelines and infrastructure spending has led analysts to portend increasing export volumes. Moreover, new estimates from OPEC suggest that oil demand will continue growing at high rates, with their estimates concluding that in 2017, demand will reach 1.2 million barrels per day. The driving factors of this growth are (1) the continued demand for road transportation as well as (2) the expanding petrochemical sectors in both America and in China. OPEC cites expected increase in vehicle sales in the U.S., Europe, China, and India as further evidence of heightened demand. The oil cartel maintains these optimistic claims despite expected increases in oil regulation and alternative technological developments.

By Michael McDonald of Oilprice.com

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