After a dismal week, which saw Brent losing $6.54/bbl and WTI falling $5.74/bbl some relief was provided Friday afternoon much to the satisfaction of the Fed chair. US job growth slowed more than forecast in April and unemployment crawled up by 0.1% to 3.8%. Undoubtedly, it is a welcome development for US monetary potentates as one of the major hurdles that stands between current and lower interest rates is the tight job market. Equities rallied on Friday and kept advancing yesterday whilst bond yields and the dollar retreated from Thursday’s settlement levels.

Under normal circumstances oil would be expected to follow the movements in other risk assets but conditions in the Near East have been anything but normal in the past 7 months. Yesterday morning Israel called on Palestinian civilians to evacuate the southern Gazan city of Rafah, which was taken as a sign of imminent military operation on the Hamas stronghold. Oil prices rallied but the wind was taken out of the sail a few hours later when the militant organization reportedly accepted the proposal of a temporary ceasefire, which would include prisoner swap – something that has been denied by Israeli officials claiming that it was a ‘softened’ version of the proposal put forward by mediators that was agreed, something that is unacceptable for the Jewish state. Israeli air strikes have continued overnight, truce remains elusive, and even if it is reached the question remains whether Houthi hostilities in the Red Sea would cease and the Suez Canal would re-open significantly mitigating the risk of shipping throughout the region. And it would take a bold investor to bet on it.

The Impact of US Shale on Ukraine

In his pugnacious speech at the Munich Security Conference in February 2007 the Russian President Vladimir Putin shocked his audience by saying that ‘I think it is obvious that NATO expansion does not have any relation with the modernisation of the Alliance itself or with ensuring security in Europe. On the contrary, it represents a serious provocation that reduces the level of mutual trust. And we have the right to ask: against whom is this expansion intended?’ Oil prices were on their way up to $147/bbl. Just after this peak was reached, in August 2008, Russia invaded the independent Georgia on the subterfuge of the latter committing genocide in South Ossetia. When in March 2014 Crimea was annexed, Brent was resolutely above $100/bbl. Slightly over two years ago it launched its offensive against Ukraine. In January 2022, the European benchmark traded above $90/bbl.

Russian belligerence and military conquests highly correlate to oil prices, it appears. Logic then dictates that the invader would ostensibly suffer a significant setback in its attempt to occupy Ukraine if oil cheapened considerably. After all, Russia’s main source of revenue that finances its military comes from exports of fossil fuels. And technically such a move is plausible, just think of the spare capacity Saudi Arabia and its Persian Guld allies sit on. Politically, nonetheless, it will not happen. Since the emergence of the US shale industry the Kingdom’s relationship with the US has cooled whilst its interests have become more aligned with Russia, as mirrored in the formation of the OPEC+ consortium in 2016. Co-operation between the Kingdom and the world’s biggest oil consumer is still tangible in the area of defense and Middle East security but Saudi priorities in the oil sector has clearly shifted away from the former strategic ally. The seismic changes in the US oil sector and in its relationship with Saudi Arabia, which used to be based on an indestructible foundation is aptly mirrored in crude oil import volumes as updated monthly by the EIA.

The arrival of the US shale sector made the country the world’s largest oil producer currently pumping around 13 mbpd, a giant leap from the 5 mbpd observed in 2008. The inevitable consequence of this ever-increasing volume of domestic crude oil is a declining reliance on foreign oil, let it be crude or refined products. Gross crude oil imports have gradually declined from over 10 mbpd 17 years ago to around 6.5 mbpd this year. Add to that product figures and you will see gross combined shipments from oversees plunged from nearly 14 mbpd close to 8 mbpd during the same period.

A more accurate picture of the US dependence on foreign oil surfaces when export data is added to the equation and a net result is achieved, which is truly gobsmacking. In 2007 the US sent 1.4 mbpd of oil, almost exclusively products abroad. Then, as US production started to take off the crude oil export was lifted at the end of 2015, gross export volumes jumped to 7.6 mbpd by 2018 and ascended further breaking above the 10 mbpd mark last year and averaging 10.7 mbpd in the first two months of 2024. When deducting the gross export figures from imports it will appear that the US became net exporter for the first time in history in 2020 (635,000 bpd) and has not looked back. Last year’s combined net export volume increased to 1.6 mbpd rising further to 2.3 mbpd in January and February 2024.

This is what is called oil independence and a drastic reduction of reliance on former trading partners, such as OPEC, the Persian Gulf nations, or Saudi Arabia, itself. OPEC’s market share of the total US gross crude oil imports has declined from the peak of 55% in 2008 to 13% this year, Persian Gulf OPEC producers’ slice of the cake diminished from 24% to below 7% and Saudi Arabia is now sending a mere 274,000 bpd of crude oil to the US, compared with 1.5 mbpd in 2008, a decline of 82%. It is the latter figure that tells us that albeit the two countries will keep leaning on one another in certain areas, the US will be unable to count on the Kingdom to undermine Russia in its offensive against Ukraine. Financial and military aid to the Ukraine, and embargoes, particularly technological sanctions on the aggressor are the way forward, but US independence outlined above means that oil will not be weaponized.

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