While there are renewed market concerns about COVID-19 cases flaring and countries reimposing isolation/containment measures (possibly extending the time for a full global economic recovery), the fact is the global supply/demand balance has continued to tighten. Based on our estimate for end-October, inventories in the Organization of Economic Co-operation and Development (the proxy for global storage) have been drawn down 480 million barrels since July 2020. This represents the largest reduction in inventories since 1971, which is how far back our oil balance model stretches.
Consuming nations clamoring for the “end of oil” are attempting to lever down crude prices. Many of these same countries are hampering the ability of their domestic oil producers to raise oil output, which is quite an irony. If we turn our attention to the US, lawmakers and the White House are jockeying to counter oil’s current bullish fundamentals. The bag of tricks now includes a discussion about re-imposing a ban on crude exports.
First off (and we are not going to turn this into a complicated discussion about chemical engineering), most market watchers do not understand shale crude is unsuitable for use by most US refineries. America’s facilities have been engineered to run heavy and medium grades of crude. Over the past four decades, the industry prepared for feedstock that were expected to become heavier and heavier grades of oil — this was the case until the advent of shale crude.
In point of fact, the growth of shale production and its inherent incompatibility with US refining capacity was why there was a push for crude exports being permitted (it was finally adopted by Congress in December 2015). As correctly anticipated, the permitting of crude exports was followed by a build-out of 6.5 million barrels per day of export capacity — which is in various stages of completion. Before the pandemic affected demand and global refining levels, US crude exports actually tipped the scale at just over 4 million bpd.
Perhaps more important, we note that US gasoline prices “at the pump” are tied to world crude benchmarks such as Brent (as opposed to domestic grades of oil such as West Texas Intermediate). We have published various analyses over time clearly demonstrating this relationship. The US reintroducing a ban on crude exports (which we think is a low probability event) would effectively cause WTI and similar crudes to be priced at a deep discount to world benchmarks. But, from a broader perspective (and this is important), a ban would cause crude feedstock availability issues for non-US refiners. This would intensify bullish oil price pressures on non-US crudes that would (… wait for it …) push up the price of gasoline “at the pump” in America.
Tangentially, a relative weakness of US light/sweet crude prices would exacerbate what we already see as the twilight phase of the shale crude story. From our perspective, then, the only real risk from the drama we are witnessing would be oil bears getting a false sense of security. Bullish oil market fundamentals continue to manifest in line with our forecast and we expect they will continue to unfold.
• Michael Rothman is the president & founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life,” which is available on Amazon.com.
