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Higher US Exports, Tighter WTI/Brent Spreads

Author: Brynne Kelly 3/05/2023

Analysts say the Oil market will face a shortage by the second half of the year, — a topic that will likely factor significantly with industry leaders meeting in Houston for CERAWeek, the major annual energy conference run by S&P Global next week.

On March 6-7, 2023, Under Secretary for Economic Growth, Energy, and the Environment Jose W. Fernandez will travel to Houston, Texas for CERAWeek 2023 to engage with government officials and private sector leaders on global energy issues including: supply chains, clean fuels and technologies, energy security, and the critical minerals needed to build the clean energy economy of the future.

Special Presidential Envoy for Climate John Kerry and Assistant Secretary for Energy Resources Geoffrey Pyatt will also participate in CERAWeek to promote clean energy transition and global energy security policy objectives.

CERAWeek, taking place in the George R. Brown Convention Center and the Hilton Americas Hotel, is focused on the entire energy industry, with several themes this year — including shifting geopolitics, supply-chain and infrastructure constraints, tech and innovation, future of work, and more.


On another note, China met over the weekend and set a modest economic growth target of around 5% for the year, with the nation’s top leaders avoiding any large stimulus to boost a recovery still being weighed down by weak business confidence and an uncertain property market. The China data out over the weekend that isn't particularly promising. But, this could be how they manage expectations. China's State affiliated Global Times said this Sunday night:

China's 5% growth target clearly leaves some leeway. It’s possible that it can grow by more than 6%. Because as long as tourism this year can recover to 85% of that in 2019, it will contribute 3 percentage points to GDP. And last year's GDP growth was 3%. Hu Xijin .

Overall, the China recovery is at least on paper a little slower than anticipated thus far.


Friday's reversal in summary: Oil got slammed from a story in the WSJ that there was dissension in OPEC, implying there would be rogue UAE selling soon.

Still formally allies, Saudi Arabia and the U.A.E. have diverged on several fronts, competing for foreign investment and influence in global oil markets and clashing on the direction of the Yemen war. The disagreements once unfolded behind closed doors but are increasingly spilling out into the open, threatening to reorder alliances in the energy-rich Persian Gulf at a time when Iran is trying to exert more sway across the region and Russia's war in Ukraine has raised crude prices and roiled OPEC decision-making.

Then Reuters posted a comment that the OPEC insurrection was “Far from the truth”



And zoom...oil took off, undoing the dive, and catching up to stocks on the day. One thing is increasingly certain: Oil is a very big political football now. We would not be surprised if that story was ”leaked” to the WSJ by someone who wished harm, only to see it backfire a bit. Oil is increasingly becoming a geopolitical weapon with the back and forth between the Biden administration and OPEC+ last year. We just cannot put it past anyone these days.

US Import/Export Activity

Despite the dueling news items and China's economic 'hurry up and wait' theme, US crude oil exports hit another record high for the week ending February 24, 2023.

US Exports Hit Another Record High for Week Ending 2/24/2023

Notable in the above chart is the fact US exports tend to be very cyclical to begin with, peaking in mid-to-late winter as they should be now. The two pronged questions then become: will US exports pull back and normalize in the coming weeks, and even if they do, will they now base at higher levels?

The effect the higher exports are having on WTI/Brent spreads may give a little help on that question.

Impact of Higher US Exports on the WTI/Brent Spread

First off, higher US exports have had an impact on WTI/Brent spreads. The US exports WTI frequently, used to satisfy unfilled Brent demand every year. This past year, the exports have been large and increasing for sure, implying a bigger demand (and/or smaller supply) for Brent benchmark oil globally. This was no doubt a function of the war and sanctions on Russia in part. That trend has manifested in the definite downward trend (chart below) in WTI/Brent.

WTI Lower than Brent on the Year, but Higher on the Week...


Last week saw US exports grow once again, and again to new ATHs. But the spread increased this time breaking trend. This implies something different. If WTI exports are growing while the spread is increasing, it warns of shrinking global demand while the US is exporting more.

Classically, the US will export more oil when global demand for Brent is insatiable. WTI exports chase the demand trend. That is what happened the past few months. WTI exports increase, and the spread drops indicating potentially unfilled Brent demand.

But last week we saw US exports increasing more with Brent demand possibly flat. It is only one week and certainly can be an aberration but it has to be noted. Especially in light of the geopolitical gamesmanship going on and the inclusion of WTI in the Brent basket soon.

Factually, China's recovery is not yet on track (if you believe that) according to them.


What's also notable is that the rise in US exports the past two weeks has created a pause in the trending inventory rise since the end of January. This is possibly a fly in the ointment for bears. Maybe Brent demand isn't big right now, but US WTI supply still has some catching up to do. If this turns downward, a bullish echo of last year may occur.

Complicating things once again and another echo of last year is the fact that the SPR is again being spent. We have 26 million barrels coming to market from the SPR between April 1 to June 30. Everything could change should US exports normalize at the same time.

Exports Keep a Lid on Local US Inventory...

Taken together, we'd be more bullish if either: China were on track, or if the spread was not popping while the US exported so much. Next week's exports are obviously key in combination with how the spread is doing then. That said: if oil turns upward next week, and that spread turns downward again, it could well be off to the races

At the moment, the reaction of the WTI/Brent spread (narrowing) is consistent with the deferment of China's economic recovery timeline. As in, we are sending oil out too soon maybe? There is risk of a break in this trend relationship if the US is supplying the world before needed.

For now, the impact of more US oil hitting global markets has been to lower global benchmarks relative to US WTI. Suggesting that there isn't a real demand pull yet. The oil is finding a home, but at lower spread margins.

This will all change if China's recovery comes into high gear. Monetary policy changes notwithstanding this will solidify the bull case. Then you will see that spread turn downward even with high exports.

Bottom line: Bulls want China to get on its horse or Powell to shut off his money shredder

US Exports Thwart Europe's Demand for Russian Oil

The US is actively working to replace Russian supply to Europe. We have basically cut off Europe's demand from Russia. They may be starting to feel the impact.

JPM's Oil Weekly notes:..

Russia’s oil and gas revenue further slumped 46.4% year on year in January, a critical issue given it accounts for about 40% of Russia’s federal budget. Combined with spending that ballooned 59% and a 28% fall in non-energy revenue, the drop in energy tax revenues led to a significant deterioration in the budget deficit (Figures 1 & 2). To plug the holes, the government had to tap into its rainy-day National Welfare Fund (NWF), selling 3.6 tons of gold as well as 2.3 billion of Chinese renminbi.

Why do we mention this? Because it means US export increases make more sense in geopolitical context as policy designed to punish. The US is hellbent on crippling Russia's economy. It's clear one way the west can do this is via lower oil prices. Russia is fighting back with supply cuts rather well so far. Which frankly is why we are also keeping an eye on OPEC+ to further bolster prices with some of their own cuts in solidarity. But nothing has happened yet.

It's becoming more apparent if not obvious that the US may be doing to oil what Japan did to semiconductors in the 80's. We are dumping to hurt the competition. (Japan lost that one BTW). For the moment, the oil we are sending out is the marginal barrel keeping a lid on global prices. But driving season is starting now, and with that, domestic WTI demand should spike

Bottom Line: Exports, WTI/Brent, & War Games

US exports are definitely putting a crimp in re-stocking domestic inventory headed into driving season now. More SPR oil is coming, but the market knows this now, and did not seem to mind.

WTI/Brent spreads had been in a decent trend lower indicating global Brent demand even as US exports ramped up. Last week that changed despite US exports ramping even higher. it is too early to call the flat price uptrend in jeopardy, but unless China overperforms soon, there could be more support for the spread.

The US seemingly is using its Oil more and more as a hammer to hit Russia's economy, but that is speculation.

Finally, we note that Russia has cut back supply, and are keeping an eye on OPEC+ for them to pushback and cut their own supply.

To those going, enjoy CERAWeek in Houston. To those not, happy trading this week


EIA Inventory Recap - Week Ending 2/24/2023

Weekly Changes

The EIA reported a total petroleum inventory BUILD of 0.50 for the week ending February 24, 2023. Of this, Commercial inventories made up 1.20 of that BUILD while SPR inventories were flat on the week.

YTD Changes

YTD total petroleum EIA inventory changes show a BUILD of 78.60 through the week ending February 24, 2023, well above prior year builds through this date.

Inventory Levels

Only Gasoline inventory levels remain below their 5-year average for this time of year while US Commercial Crude inventories continue to exceed its 5-year average.


486 views1 comment

1 opmerking

08 mrt. 2023

Another very informative piece. Thank you! Where can we find the JPM Weekly Oil notes? Is this publicly available?

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