U.S. Oil Exports Increase While Import Dependence Falls

Friday April 7, 2016

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. U.S. oil import dependence down from shale revolution

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- The U.S. used to import roughly 60 percent of the oil it needed for its domestic consumption, a figure that rose for about two decades ending in the mid-2000s.
- Import dependence has been declining for nearly ten years. This is partly due to oil prices rising sharply in the mid-2000s. Also, the U.S. introduced fuel economy standards - which began under the Bush administration and were tightened significantly under the Obama administration.
- Obama-era CAFE standards put the U.S. auto industry on course for an average of 54 miles per gallon by 2024.
- Carmakers have made the fleets more efficient as a result.
- But the supply-side effect of the fracking revolution led to a surge in U.S. domestic output, cutting out a lot of imports.
- Altogether, U.S. import dependence fell to under 30 percent last year.
- A coalition of companies, including FedEx (NYSE: FDX) are lobbying the Trump administration to refrain from derailing this progress by rolling back fuel efficiency standards, warning that domestic supply will never be enough to make the U.S. energy "independent."

2. Investors don't like oil sands

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- ConocoPhillips (NYSE: COP) agreed to sell Cenovus Energy (NYSE: CVE) most of its oil sands assets, a deal worth as much as $13.2 billion.
- The sale is the latest in a string of exits by oil majors from Canada's oil sands. The majors are backing out of high-cost long-cycle Alberta production and using cash to invest in short-cycle shale.
- And the reaction from the market was very clear: Conoco's stock soared on the news by almost 9 percent; Cenovus saw its share price plummet by nearly 12 percent.
- Cenovus has net debt that was equivalent to less than 1.4 times its cash flow for 2017, a ratio that spiked to 3.2 times cash flow after the purchase.
- Meanwhile, profiting from the oil sands is not something investors are convinced is a sure bet. Even though they are long-lived assets, oil sands are some of the most expensive sources of oil in the world.
- For now, investors are rewarding companies for getting out of Canada's oil sands.

3. U.S. oil exports surge in February

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- U.S. oil exports jumped by more than 35 percent in February from a month earlier, hitting a record high 31.2 million barrels for the month.
- China bought up a lot of American crude, quadrupling its purchases from January.
- The U.S. export ban was lifted in late 2015, and exports are finally starting to ramp up, taking the U.S. above the 1 million barrel per day (mb/d) mark, at least temporarily. That is more than some OPEC countries.
- The reasons could be fleeting, however, according to Bloomberg. Seasonal maintenance from Gulf Coast refineries led to more crude being dumped abroad. Also, WTI is trading at a discount to Dubai after the OPEC production cuts, a differential that is not guaranteed to last.

4. Benchmark spreads explain U.S. exports

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- The OPEC cuts have pushed up the Dubai benchmark price as oil from the Middle East has become dearer.
- That has opened up a relatively wide differential for Dubai and other benchmarks, with Dubai trading at a premium WTI, and its discount to Brent narrowing.
- Dubai could trade at a $1 to $1.50 per barrel discount to Brent in April and May, according to a survey industry traders, a much narrower discount than the almost $4 per barrel from last year.
- As a result, U.S. exports have surged (as noted previously), as American shale is now more competitive in Asia relative to Middle Eastern oil.

5. Futures curve flattening out

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- Compared to before the OPEC cut, the WTI futures curve has flattened out tremendously.
- The flat curve, combined with the fact that prices are low in general, is forcing the industry to focus increasingly on short-cycle shale projects.
- Producer hedging is also adding to the flatness of the curve, as companies lock in future production at fixed prices.
- The flat curve is scaring away investment, industry experts say.
- That could create supply problems in a few years as demand continues to rise. "We are sowing the seeds for potential instability in the future and more volatility," Daniel Jaeggi, president of Mercuria Energy Group Ltd., said at the FT Commodities Global Summit in late March. By the end of the decade, "you won't be able to satisfy demand with short-cycle barrels."

6. Dividends on shaky ground

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- The oil majors are struggling to breakeven in today's market at $50 per barrel. BP (NYSE: BP) has said that it needs $60 per barrel to breakeven.
- The companies have trumpeted improved cash flow with the uptick in oil prices over the past few months. But the majors are still running up debt after considering payments to shareholders for dividends.
- Dividends for the majors are sacred, and nearly all of them are choosing to dump assets and sacrifice future growth in order to keep dividend payments intact.
- But their dividend yields are rising to worrying levels. Both BP and Royal Dutch Shell (NYSE: RDS.A) have dividend yields at around 7 percent, much higher than some of their peers: Exxon's (NYSE: XOM) is only 3.64 percent; ConocoPhillips (NYSE: COP) has a yield of just 2.16 percent; and Chevron (NYSE: CVX) has a yield of about 4 percent.
- "BP and Royal Dutch Shell have unsustainable dividends," Neil Woodford, head of investment at Woodford Investment Management Ltd., wrote recently. "These companies are liquidating themselves rather than facing up to the need for a dividend cut. The only thing that can save them from that eventuality is a return to sustainably higher oil prices -- something that I think is very unlikely to happen."

7. Saudi foreign exchange continues to sink

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- Saudi Arabia continues to burn through its cash reserves despite the uptick in prices since the OPEC deal was implemented.
- Saudi foreign exchange has declined by an average of $6.5 billion per month for the past year, according to Bloomberg. But the drop off in January and February was actually higher than that average at $11.8 billion and $9.8 billion, respectively.
- Total assets now stand at $506 billion, down from the $737 billion peak hit back in 2014 when oil prices were at more than $100 per barrel.
- There is still plenty left in the war chest, but the burn rate could eventually raise questions about the stability of the country's currency peg.
- Saudi Arabia is trying to pull off a difficult balancing act: keeping the economy going, diversifying non-oil sectors of the economy and, in the meantime, trying to boost oil prices but not too much so as to provoke U.S. shale drillers.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.