United States becomes largest producer of oil in the world

The United States is now the largest oil producer in the world and, this increased production is disrupting global oil markets. US production is now at a record 12.1 million barrels a day more than that of Saudi Arabia or Russia.

US to become a net exporter of oil

US exports are more than three million barrels a day above that of many OPEC countries. Daniel Yergin of IHS Markit said: "Within the next two or three years, the U.S. will be a net exporter. By the end of the year, the U.S. will be producing 13 million barrels a day. This growth is a seismic event for the U.S. economy at this scale. U.S. oil production is 2.5 times what it was in 2008."

US shale production has created a problem for markets as it increases a great deal as prices go up creating a supply glut but then is cut back as prices slide back. To stop the glut Saudi Arabia and other OPEC members in cooperation with Russia have tried to reduce or add supply to the market depending on conditions.

Trump has made the US more active in the market

Helma Croft, head of commodities strategy at the Royal Bank of Canada said: "It's really become such a huge story in terms of U.S. production, but also because of our policy. The U.S. is a swing producer but it's also through policy that we've taken 1.6 million barrels off the market. We've been really lucky we've had the U.S. producers. That's where the U.S. currently plays a role in helping out the market. Trump talks to the Saudis. Trump sanctions Venezuela. He's really active in the market. Have we had a U.S. president be this consequential in the oil market, in terms of intervention?"

Trump has added to market volatility by introducing sanctions against countries such as Venezuela and Iran. However, he has also granted waivers on the sanctions after saying he would not. India and others were granted waivers last fall. Iran exports are now about 1.1 million barrels a day but this is still down from the 2.5 million the exported in the spring. The waivers come up for review in May so if they are not extended then even more Iran oil will come off the market.

Market volatility likely to continue

Carlos Pascual, IHS Markit senior vice-president said: "It's going to be a market with tremendous volatility. In 2018, the price of [Brent] oil went between $50 and $86 a barrel, but the average was $70. For the person looking at it and saying '$70, that's not a big deal,' depending on when you were buying, what country and what situation, the difference between $50 and $86 could be huge. We're looking at a similar kind of [oil] market in 2018. A lot of volatility and an average that keeps us in a similar range of $70 a barrel. In that sense the sanctions on two OPEC members could potentially add to some of the uncertainty and volatility around that market."

The Saudis are committed to cutting back production to 9.8 million barrels a day after they had been putting almost 11 million barrels a day on the market last fall. As both the Saudis and Russia agreed to cut production prices began to increase again.

However, some Trump tweets still complain about high prices. Franciso Blanch, of Bank of America Merrill Lynch said: "Trump seems to have picked up a fair amount of influence over OPEC and certainly the oil market has started to fear the Trump effect. Whenever he tweets prices shouldn't go higher. The fear is the Saudis will follow and deliver, as they have so far. Shale will deliver if the Saudis don't."

The cost of production from shale has been dropping as well. Just this past week, Chevron and Exxon announced they are increasing production in the Permian Basin. Exxon said production in the basin would still be profitable even if oil prices dropped to $35 dollars a barrel.

United States may become the world's biggest oil exporter within five years

The International Energy Agency (IEA) makes the prediction that the U.S. will soon become the world's biggest oil exporter in a recent article. By 2024 the IEA predicts that US exports of crude oil and petroleum products will almost double to about nine million barrels per day (bpd) . At this level, the US will be exporting more than Russia and will threaten to overtake Saudi Arabia as the top exporter.

Just weeks ago, the US exported a record 3.6 million bpd of crude oil. The US is also a major exporter of petroleum products such as refined fuels.

IEA executive director Faith Birol said: "The second wave of the U.S. shale revolution is coming. It will see the United States account for 70 percent of the rise in global oil production and some 75 percent of the expansion in LNG trade over the next five years. This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy."

While the IEA thinks that the development of electric vehicles (EVs) will sap some of the demand for gasoline, it thinks that this will be offset by rising demand for petrochemicals and jet fuel. Demand is increasing in the US as Birol notes: "US oil consumption [growth] last year was about a half-million barrels per day, and as such it was the highest in all the countries around. It was the first time that the United States in the last two decades was the No. 1 driver of oil consumption growth." Surprisingly this happened as global economic growth has slowed.

Previously published in Digital Journal

Trumps plan to sell off some of the US oil reserves roils oil markets

(May 24)The Trump plan to sell off half of the US strategic oil reserve was a surprise move and goes counter to OPEC's attempts to limit supply and boost prices.

The recently released Trump budget plan would see half of the US Strategic Petroleum Reserve (SPR) sold off over ten years, starting in October 2018.

The U.S. SPR contains about 688 million barrels, the world's largest reserve. The sale would bring in $16.5 billion. The release would be about 95,000 barrels a day or one percent of U.S. current output. Ironically the news comes just after Trump visited Saudi Arabia, which is attempting to persuade OPEC and other countries to reduce production to raise prices.

U.S. production has surged by almost half in five years and so it could be argued Trump's move makes good sense at least from an America First perspective, although no doubt U.S. producers would also like to see higher oil prices as well.

Following the announcement Anas Alhajji an independent oil analyst said of the move: "It will complicate the OPEC efforts to stabilize the market." It is possible that Congress may not accept the proposal but even the suggestion was sufficient to result in slightly lower oil prices for WTI crude. However overall stocks rose as the earlier Trump Slump has now been overcome: "U.S. stocks climbed to fresh records, while the dollar slipped with Treasury yields as minutes from the Federal Reserve’s last meeting showed officials unperturbed by recent signs of economic weakness. Crude slipped."

After the oil shock in the 1970's the U.S. began building SPR sites that would hold 90 days worth of a country's estimated daily demand. The U.S. released supplies at the start of the Gulf War in 1991 and after Hurricane Katrina disrupted supplies from the Gulf. It also released supplies in 2011 amid concerns about Libyan supplies. However, last December the Congress approved the sale of $2 billion from the SP to pay for maintenance and repairs to storage facilities. The U.S. Department of Energy sold 6.4 million barrels in January and another 10 million this February.

The White House proposal would also open the Alaskan arctic region to oil exploration. U.S. production could go from the present 9.3 million bpd to 10 million. This would bring the U.S. close the Saudi Arabia and Russia as the world's largest oil producer. The recent increase in U.S. security of supply is from the growth in shale production in the U.S. Virendra Chauhan, an oil analyst says: ."The U.S. has likely become more sanguine when it comes to having a very large SPR holding, given lofty medium term forecasts for the Permian basin." The Permian Basin is a large shale field in the U.S.

OPEC is likely to be able to extend production cuts for another nine months as the group meets this week to discuss how to combat a global surplus of crude. Saudi Arabia favors the extension as compared to the originally planned six months. It wants to prevent the price of oil sliding down to less than $50 dollars a barrel. Iraq agreed to a nine month extension. The deal was reached in December in which OPEC and 11 non-members including Russia agreed to cut output by 1.8 million bpd during the first half of 2017. However, the boost in price has increased U.S. production and now the U.S. is making things worse by its plan to put half of its reserves on the market.

Canada has actually helped OPEC reach its goal:Canada, as one of the world’s largest non-OPEC oil and gas producers, has held back more output than any individual OPEC member in the latest round of cuts since well before the current pact was in place. Based on nearly a dozen estimates collected from top energy investors, industry experts and academics, BNN has determined Canadian oil production would be far higher today were it not for a constant lack of pipeline export capacity over the first half of the past decade.The lower production is for the most part due to the lack of more pipelines needed to increase exports. However, it also means that Canada is getting a better price than it would if there were an even larger glut on the oil market.

Oil prices may begin to decline again

Gulf oil platform

As the number of U.S. oil drilling rigs is rising and Canadian production from the oil sands begins to come on line again after recent fires, the price of oil is beginning to fall. Oil prices were down 3 percent on Friday.​ It appears that weekend profit-taking in Brent and US crude futures also helped drive prices down. Brent's front-month price was down $1.41 at $50.54 a barrel. West Texas Intermediate (WTI) fell $1.49 to $49.07. This is the largest drop since early April.

For the entire week, however, Brent rose 2 percent and WTI about one. Crude futures are also almost 90 percent higher than the 13-year lows during the winter as supply disruptions in Nigeria, Canada, Libya, and Venezuela drove prices up. Prices had earlier gone down to below $30 dollars a barrel.

In the US, drillers added three oil rigs in the week up to June 10. In the previous week, nine rigs had been added. Tariq Zahir a trader in WTI futures said: "This looks like the beginning of a trend that will translate to the slowing down of U.S. crude production declines. I'm adding to my short positions in spreads." Scott Shelton, energy broker with ICAP in Durham, North Carolina said that the rise in rig counts so far will not significantly change the supply of crude.

The price of oil has almost doubled from the lows reached in the middle of January this year. Brent rose above $50 a barrel and stayed there. WTI has risen considerably as well. While there have been serious disruptions of supply in Canada and Nigeria and little production in Libya that helped eliminate the oil surplus, Canadian production is already beginning to come back on line. Production in the US has just risen for the first time in three months. In spite of the outages, the IEA still sees global inventories as rising through August. Any improvement in the situation in Nigeria or Libya could see prices fall further.

For the longer term, new discoveries off the coast of Newfoundland may further add to production already coming from the nearby Hibernia field. Statoil, the Norwegian oil company, claims a 19-month drilling program discovered oil at two location in the Bay du Nord area in the large Flemish Pass area. Statoil says that it appears that reserves at the Bay du Nord side were likely at the lower end of the estimated 300 to 600 million barrels. Paul Fulton, president of Statoil Canada said: "The recent drilling program has been critical to Statoil's continued assessment of Bay du Nord and work is underway to evaluate the results related to proceeding with a potential Statoil-operated development in the Flemish Pass Basin".