Do you remember the oil glut? Sure you do. It was not that long ago. The mother of all oil gluts. The oil glut that was supposedly so insurmountable that it was poised to keep oil prices lower for longer. In fact, some predicted that oil might not even trade above $30 a barrel ever again. Yet, now the glut is gone. Global oil prices are surging because we are now facing a market that is undersupplied as demand surges and there are no viable short-term solutions that can solve the issue.
This fact is starting to dawn on the marketplace, especially after OPEC and its Non-OPEC co-conspirators failed to increase production, despite pressure from President Donald Trump, raising doubts that they have enough spare production capacity to bring on enough production to offset lost barrels from Iran, Venezuela and questionable stability in Libyan output. While they assure us that they can, the market is skeptical. OPEC production fell last month.
The globe is also facing an increasing oil production decline rate that is only going to get worse after years of cutbacks in capital spending. Shale Oil production is also struggling to grow and despite its bright future is not able to offset the reduction in conventional oil plays. While many are shocked that we are at this point, they really should not be. It is the same story that we have seen in every boom and bust cycle since the beginning of time.
Brent Crude is leading the pack. OPEC’s non-action will tighten supply in Europe as we go forward. Diesel supplies globally are tight and despite that, we have a lot of shale, oil there are shortages of medium crudes that will only get tighter after Iranian sanctions reduce the export of medium-density oil from Iran. New regulations on cleaner-burning ship fuels will only cause further tightness in the market.
While U.S. shale can’t solve all problems, the Energy Information Administration is reporting that crude oil surpassed hydrocarbon gas liquids (HGL) to become the largest U.S. petroleum export, with 1.8 million barrels per day (b/d) of exports in the first half of 2018. U.S. crude oil exports increased by 787,000 b/d, or almost 80%, from the first half of 2017 to the first half of 2018 and set a new monthly record of 2.2 million b/d in June. Much of this crude oil went to destinations in Asia and Oceania such as China, South Korea, and India. Europe was the second-largest market for U.S. crude oil exports, led by Italy, the United Kingdom, and the Netherlands. Canada was the only major U.S. crude oil export destination where exports decreased, down slightly in the first half of 2018 compared with the same period in 2017.
