Earlier this month, the number of oil swaps linked to oil produced in Texas hit a record. To date, the number of such swaps in total also sits at a record. Later this year, the Wall Street Journal reports, a Texas oil grade will be added to the Brent complex of crude contracts. U.S. oil is going places.
During the first shale revolution, there was probably hardly much thought about becoming an exporter of crude. The point at the time was to boost self-sufficiency and, really, see just how much oil one could get out of those shale rocks in the Eagle Ford and the Permian.
After the first downturn that bruised the industry quite painfully, producers got smarter. They learned to pump more with fewer expenses. The second shale boom unfolded, and even the biggest isolationists in Washington realized the U.S. could once again become an exporter of oil. The oil export ban was lifted, and American crude began traveling the world.
These travels made the U.S. a factor in global oil price-setting just as it climbed up to the place of the world’s biggest oil producer. OPEC had a worthy challenger for the first time in its history. The change was so dramatic that oil market observers touring the media produced a mountain of analysis claiming that OPEC was dead, killed by U.S. shale.
While this proved to be a premature statement, the price-setting power of the United States on the oil market has certainly increased significantly. Most of the significance of this increase came last year, after the European Union began sanctioning Russia for its invasion of Ukraine and, among everything else, targeted its oil sector. The obvious alternative for the still energy-intensive EU was the oil produced by its sanction allies in the United States.
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Since President Obama lifted the ban on oil exports in 2015, sales of U.S. crude abroad have risen 10 times, the Wall Street Journal reported, noting a record high of 5.1 million barrels daily, hit last October. The strong sales trend is likely to continue even as the EU continues to reduce its consumption of fossil fuels.
The WSJ report notes that U.S. oil is not just being sold to traders and refiners. U.S. oil-based derivative contracts are being used as a hedge against price volatility by many players in the industry, further increasing the prominence of the product.
In 2021, ICE, the stock exchange operator, and S&P Global Platts, which reports and provides assessments on benchmark prices, published a joint white paper suggesting the Brent complex needs updating. The update would include an addition of another crude to the Dated Brent contract. The two contenders were WTI Midland and Norway’s Johan Sverdrup.
The two eventually picked the WTI Midland because of its similar properties to the original Brent crude, which was no longer produced in large enough volumes to be able to matter on its own, according to ICE and S&P Global Platts.
The light, sweet Texas crude appears to be well-liked by refiners. “The European refinery market loves that stuff. The Chinese refinery market loves that stuff,” the head of market reporting and trading solutions at S&P Global Commodity Insights told the Wall Street Journal.
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U.S. oil is definitely going places and setting prices. Last year, U.S. oil shipments to Europe soared by 70 percent because of the anti-Russian sanctions. Exports to China are also on the rise, hitting a five-month high in January at 187,000 barrels daily. This may be a modest amount, but if Chinese refiners’ appetite stays strong, it could well grow further. OPEC is certainly not dead but it certainly has a price-setting competitor to reckon with.
By Irina Slav for Oilprice.com
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Under the administration of former President Trump, US shale oil producers were encouraged to overproduce even at a loss to undermine OPEC policies and to achieve the lofty claims of ‘energy independence’, ‘oil self-sufficiency’, ‘the world’s largest crude oil producer’ and a ‘net crude oil exporter’ all of which were never achieved and will never ever be achieved.
Before the pandemic US shale oil was looked upon as a counterbalance to OPEC. But OPEC+ has emerged as the most influential player in the global oil market.
The United States has been aspiring to become either self-sufficient in oil or a net oil exporter since the end of the WW2 but having failed consistently to achieve its ambition it turned to self-delusion and wishful thinking to claim it could become a net oil exporter in 2023.
In 2022 the United States consumed on average 20.36 mbd and claimed by the US Energy Information Administration (EIA) to have produced 11.7 mbd. This means that the United States’ net crude oil imports in 2022 amounted to 8.66 mbd. Therefore, the forecast by the EIA that that US could become a net crude oil exporter in 2023 is both self-delusional and a pipe dream.
Moreover, whatever crude oil the US claims to be exporting is not real exports since these exports are an exchange between the extra light crude the US exports and the heavier and medium crudes it imports for its refineries which they tooled to refine then heavier crudes.
Shale oil production which accounts for 64% of total US production is a spent force incapable of raising production meaningfully. The reason has little to do with capital discipline and overwhelmingly a lot to do with the fact that the sweet and lucrative spots in the shale plays have already been exhausted forcing drillers to move to poorer and more costly to produce spots thus leading to a rise in production costs and declining production.
That is a major reason why the US Department of Energy (DoE) will indeed find it extremely difficult to refill its SPR after a total withdrawal of 221 barrels in 2022. The other reason is that there is no spare oil to buy in the current tight global oil market.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert