U.S. crude exports are just ok, for now

While U.S. crude exports are increasingly important for the health of the oil and gas complex, they have come under pressure amid the COVID-19 coronavirus. In this article, we’ll describe why crude exports matter, and why they’re probably going to drift upwards in subsequent months.

Exports and Production

The story of U.S. crude exports is rather simple: as production increased, supply outstripped the ability of U.S. refiners to absorb this capacity. U.S. refineries are, on average, more complex than their international brethren and are optimized to process heavier grades of crude. This creates a mismatch between domestic supply and refinery demand. As you can see below, U.S. crude production is heavily weighted towards light and medium crude grades.

As U.S. crude production increased, barrels were sent overseas – both in absolute numbers, but also as a percentage of total crude production. Incremental crude production is largely absorbed by international markets, not U.S. refineries. The relationship between production and exports is very strong: about 80% of the variation in exports can be explained solely by changes to output in the lower 48 states.

Exports: not great, not terrible (really)

U.S. crude exports have held up decently during the pandemic, but are not showing the significant year-over-year increases seen in past years. Initial data suggests that 2020 YTD export volumes are about 10% higher than in the same prior-year period – which isn’t too shabby during a pandemic. Still, y-o-y growth rates are off considerably from 2018 and 2019.

U.S. crude exports have been supported by Chinese crude demand, as about 43% of U.S. May 2020 crude exports went to the PRC. This trend likely won’t continue due to bilateral political tensions but also (and more importantly in the near-term), because Chinese crude inventories are extremely elevated. Chinese buyers took advantage of depressed crude prices to send inventories to tank-top.

What does the future hold for crude exports? More of the same, perhaps. The futures curve isn’t predicting any dramatic change to Brent – WTI spreads (higher spreads lead to more exports), suggesting that U.S. crude exports will remain in a holding pattern. Still, crude markets face considerable uncertainty – especially from COVID-19. On balance, we expect that crude exports will continue to drift upwards in future months. Talk about China data – that exports will be more govierned by recovery in crude hungry Asia – China bought a ot of crude in Aprilk/May when prices were very low in US – filled up their stocks and therefore it will take few months before they start buying again – show the China crude import graph that we track in Red-light Green light.