U.S. crude oil exports are expected to sputter through the end of 2020 due to weak production and unfavorable economics for foreign buyers of U.S. oil, traders and analysts said.
U.S. oil demand is down about 13% from last year due to the coronavirus pandemic. Exports have become critical revenue sources for many oil companies, and the United States had regularly been exporting more than 3 million barrels per day (bpd) of crude oil. But U.S. output is not expected to recover to its 2019 peak of nearly 13 million bpd, which could hamstring exports.
Weekly data shows exports this month declined to roughly 2.1 million bpd, the lowest in more than a year, before ticking up last week, according to U.S. Energy Department figures. Analysts attribute the decline to the slowed production and a narrower discount for U.S. oil to international benchmark Brent.
“Export levels correlate strongly with production,” said Martijn Rats, Morgan Stanley’s global oil strategist.
“We could see a small decline in exports as production moderates and demand firms up domestically a tad, but on the whole we’ll probably see a flattish profile.”
The discount for benchmark U.S. crude futures to international Brent futures WTCLc1-LCOc1 is under $3, where it has stayed since May. Exports tend to increase significantly when the discount exceeds $10 a barrel and ease when it falls below $6, said Bob Yawger, director of energy futures at Mizuho in New York.
Generally, when demand falls, prices adjust. But U.S. output has been hampered by declining shale output and several hurricanes that have interrupted offshore production. Overall U.S. weekly output is currently roughly 9.9 million bpd, down from a peak of 13.1 million bpd reached earlier this year.
U.S. crude oil production is expected to fall by 800,000 barrels per day (bpd) this year to 11.45 million bpd and to 11.09 million bpd next year, according to the EIA. The pullback in supply – compared with several years of sharp growth in output – makes it less likely that U.S. prices will fall.
U.S. crude arrivals to Europe are expected to sink to 16.2 million barrels in October, versus a record 32.6 million barrels of U.S. crude that reached Europe in September, according to Refinitiv Eikon data.
“A strong amount of crude was fixed out the U.S. to Europe recently which has kept the U.S. Gulf Coast grades for November supported in terms of differentials, but the export arb is firmly shut to Europe now that the Dec WTI/Brent is -1.50,” said Scott Shelton, energy specialist at broker United ICAP.
Asian countries, including China and South Korea, are among the largest buyers of U.S. crude. China was the only major crude consumer with increased oil demand in the April-September period from the year before and ramped up purchases from the United States.
Arrivals in November to Asia are expected to be about 52 million barrels, near the record 53.1 million barrels seen in September, Refinitiv Eikon data showed. Of those, about 28.4 million barrels were set to arrive in China in November.