US crude oil production continues to soar
The oil rhetoric coming out this past week has us all nauseated. I mean, which one is it guys: is oil going to hit $400, is oil going to hit $200, is oil going to hit $90, or is oil going to hit $45?The piece goes on to report that Asian refiners have switched their operation to use the light crude from the US. The US should follow suit. It would enhance national security and reduce reliance on imported heavy crude.
So, let's hit a few things that we know.
This oil market is filled with a variety of bearish factors: rising U.S. production, rising Saudi production, an emerging U.S.-China trade war, a rising dollar, potential tapping of the U.S. Strategic Petroleum Reserve, a Brazil oil industry that is stronger than being reported, and a reopening of Libyan ports - just to name a few. These stand against some bullish factors such as new sanctions on Iran and the latest flavor of the week scare: the International Maritime Organization's move to cut sulfur in marine fuels starting in 2020. For reference, the global shipping fleet's use of high sulfur fuel oil now accounts for ~4% of the world's total oil demand, and don't underestimate the ability of clean LNG to fill the void or the ability of refineries to adapt.
We also know that weekly U.S. crude production has averaged an all time record 11 million b/d for the past two weeks, a 16% boom since early-January. We've passed Russia to become the largest crude oil producer in the world, yet at over 13 million b/d, we have been the "largest oil producer" for years now. Although a very large one, "crude" is only a subset of "oil."
Indeed, the future shines even brighter for the U.S. oil industry: the International Energy Agency just reported "the shale sector as a whole is on track to achieve, for the first time in its history, positive free cash flow in 2018." Investments were up 60% last year and are expected to be up another 20-25% in 2018.
Although in recent weeks the U.S. WTI crude price has been tightening closer to the Brent international benchmark price, our weekly exports have been hitting record highs. And if China does follow through with tariffs on U.S. crude, it would put downward pressure on WTI and widen its discount to Brent, thereby making U.S. oil even more attractive to buyers. EIA has the spread at $3 to $5 for as far as it models, which is generally a gap where U.S. exporters can still make money.