U.S. exports have spiked in recent weeks, upending longstanding trade flows, according to OilPrice.com. But while that may be good news for some U.S. drillers, the unusually high level of crude exports are not obviously a good sign about the health of the oil market. At the same time, it is not guaranteed that U.S. producers will be able to continue to ship oil abroad at such a high rate for very long.
U.S. oil producers were prohibited from exporting crude oil for decades until Congress scrapped the ban at the end of 2015. For much of last year, exports only rose slightly. But that changed in 2017 – U.S. crude oil exports topped 1 million barrels per day (mbd) several times in recent weeks, double the rate from a year earlier.
The exports provide an outlet for shale drillers but they also put pressure on the global oil market. In the past, the export ban would have meant that U.S. shale drillers would have had to suffer through a glut and cutback on production. Now, they can continue to ramp up and export the gains. Without the ban, shale drilling and production are both rising quickly. The EIA now expects the U.S. to break its all-time production in the near future, and average 10 million barrels per day next year.
However, one of the major reasons why exports are rising is because of the discount that WTI trades at compared to the more internationally-oriented Brent benchmark. WTI has often sold for several dollars per barrel less than Brent, making it much more attractive for buyers. Thus the surge in exports this year.
But as buyers turn to American crude, the WTI benchmark is set to converge towards Brent, shrinking the discount. In fact, that is already happening. The WTI-Brent discount shrank from nearly $3 per barrel in May to less than $2 per barrel more recently.
Even if we assume that oil inventories continue to fall, it might only be because refiners are spinning out gasoline and diesel and exporting it. Rather than that resulting in a true rebalancing, it would simply shift the glut to the international market. In fact, a new report from Morningstar calls the past few weeks of drawdowns in U.S. inventories a “false prophet,” an indicator that is misleading the market. Sandy Fielden, director of oil products research at Morningstar, says that higher U.S. exports of refined products might help drain U.S. inventories, but that might also just displace crude oil demand abroad because foreign refiners no longer need to buy as much crude oil for processing.