Politics work as follows: use everything at your disposal, even a 100-year-old, obsolete law called the Second Liberty Bond Act to gain political leverage, push your country to the precipice, step back in the last second and then be outraged when you are accused of recklessness and your creditworthiness deteriorates. And the consequences of your action? A quick flight out of risk assets, despite upbeat outlook.

Equities fell hard and oil followed notwithstanding an unambiguously bullish weekly inventory report.
Undoubtedly, the US government will have to borrow more but the downgrade of the US government credit rating by Fitch will unlikely worsen the US bond market standing amongst investors and US borrowing costs should not move higher. It is useful to look back at what happened when the S&P cut the US creditworthiness in 2011, something we will plan to do in tomorrow’s note.

For now, however, there are a few questions that need to be addressed. Is the latest downgrade will have a material impact on the US and the global economy or on inflation? The answer is no. Will US and global oil demand be negatively impacted? No. Are global and regional oil inventories going to decline in coming months? Yes. Does the underlying oil balance have to be amended? No.

We might be way off the mark to dismiss the downgrade as a short-term aberration but currently there seems to be no reason to update our projection. Oil stocks are still expected to plunge in coming months, and it was confirmed by yesterday’s EIA report. Total commercial inventories plunged by 10 million bbls battered by the 17 million bbls decline in crude oil stocks (15.6 million bbls in the USGC with runs rising to 94.8% there) as crude oil exports swelled by 700,000 bpd on the week to 5.28 mbpd. The world needs the black stuff. Gasoline stockpiles built 1.48 million bbls and distillate stocks dropped 800,000 bbls. In a nutshell, yesterday’s dump bears all the hallmarks of an overreaction and order  ought to be restored in the near future.

GMT +1	Country	Today’s data	Expectation
12.00	UK	BoE Interest Rate Decision	5.25%
15.00	US	ISM Services PMI July	53

 

Sturdy US Exports Keep Product Market Tight

The US oil market was fully liberalized when the crude oil export ban was lifted some eight years ago but even before that, refiners were allowed to freely send their products overseas if market conditions warranted it. Yet, what is noticeable is that in the last 15 years or so product export volume has been steadily rising. The exports of finished petroleum products that was measured at 1.25 mbpd in 2007 shot above 3 mbpd last year. The volume of finished motor gasoline increased sevenfold and distillate export volume jumped from 528,000 bpd to 1.26 mbpd. When you add to that the steady rise in crude oil exports, 

you’ll find that US exports of crude oil and petroleum products averaged 9.57 mbpd in 2022, the highest annual reading, up from 4.74 mbpd in 2015, the year the export ban was abolished.

These figures, however eye-catching, do not paint a realistic picture, simply because they are not set against import volumes, this is gross data. On a net basis, the rise is even more impressive. When annualizing weekly EIA data, one will find how marked the impact of the US shale industry has been on oil flows in and out of the country. In 2013, the US was a net importer of crude and products to the extent of 6.64 mbpd. This figure was gradually reduced from 2015 onwards and flipped to -260,000 bpd in 2020, the first year US exports exceeded imports. The pandemic forced the country to turn into a net importer in 2021 again but last year 1.08 mbpd left the US shores on a net basis. The year-to-date average is 1.73 mbpd.

The growth in net product exports is even more remarkable than the total number. Net product exports grew from 1.11 mbpd in 2013 to 2.73 mbpd in 2021. It was a resilient increase, which seemed to have peaked two years ago. Then Russia invaded Ukraine, traditional flows have been disrupted and energy security became the focal point of politicians. Under the new status quo it, therefore, does not come as a surprise that the US volunteered to fill the gap left by the perceived and actual decline in Russian product exports and the re-alignment of oil flows. Net export volumes rose to 3.85 mbpd in 2022 and to above 4 mbpd in 2023, so far.

The situation created by the war has been exacerbated by relatively healthy US oil demand together with scarce availability of US refinery capacity. US consumption is rising reliably. Last year it averaged 20.28 mbpd, this year it is forecast to climb to 20.44 mbpd, the EIA reckons, and another 350,000 bpd will be added to this year’s figure in 2024. Domestic gasoline demand at around 8.93 mbpd is struggling to make further advances, but distillate demand is to rise by 50,000 bpd in 2024. The real support comes from jet fuel where consumption is expected to jump by 190,000 bpd from 2022 to 2024.

Although US refining capacity has been expanded of late, unscheduled maintenances to the extent of around 500,000 bpd prevent domestic refiners from fully satisfying US and international thirst for products. The unreliable availability of Russian products coupled with the G7 price cap, the re-alignment of oil flows, high US export volumes to Europe and domestic refinery outages have led to supply underperforming demand. It is reflected not just in depleted US inventory levels but also in assorted crack spread values. CME Heat crack averaged $54.27/bbl last year, the highest annual value by a country mile.

Year-to-date average of $37.67/bbl comfortably claims the second place. The 3-2-1 crack spread at $121/bbl is also a humdinger for refiners, who are incentivized to run as hard as they can, but even historically high runs do not alleviate the tightness. It looks as though that unless oil demand takes a considerable hit or refiners are able to increase utilization rates and produce for domestic use not just for exports the US product market will be here to provide unconditional price support. Declining US export volumes might be the first signs of the easing of supply deficit.

 

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