U.S. Oil Doesn't Move Prices, But It's Increasingly Influential

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Decisions made by the Organization of the Petroleum Exporting Countries (OPEC) can set the tone for crude oil prices, but it's U.S. crude oil that's doing much of the heavy lifting for the global economy.

OPEC+, the core group of member states along with allies such as Russia, has routinely shocked the market with production decisions since the alliance was announced during the Trump administration.

It was former President Donald Trump who took a victory lap in 2020, after pledging to curtail around 300,000 barrels per day (BBL/d) in production to resolve a standoff between Saudi Arabia and Mexico.

Late last year, the group pointed to uncertainty about future prospects for the global economy when justifying a collective cut of 2 million BBL/d. Brent crude oil topped $97 per barrel a few short days after the announcement but closed out the year closer to $85 per barrel.

Another surprise cut of 1.6 million BBL/d was made in early April. Norwegian consultant group Rystad Energy said in the days after the announcement that the decision could push the price of Brent crude oil to $110 per barrel by the summer.

OPEC+ said the April decision was a "precautionary measure" meant to address a weakening global economy. Since then, higher lending rates and recent weakness in the U.S. labor market suggest some of the Western economies could be in recession by the end of the year.

Brent crude oil opened the trading day Tuesday at around $81 per barrel, closer to the range-bound trends in the upper $70s that held for much of March.

Both Russia and Saudi Arabia, among the more influential members of OPEC+, are churning out around 10 million BBL/d each and Russia's seat at the OPEC table was something of a coup given the group's ability to move markets. Should $100 crude emerge as many expected, it would eat into consumer spending and potentially help usher in a recession.

But another coup of sorts emerged recently--the inclusion of WTI-Midland into the basket of North Sea crude oil blends that make up the global benchmark Brent. WTI-Midland reflects activity in the Permian Basin, which accounts for around 40% of total U.S. crude oil production.

WTI-Midland is a light, sweet crude that matches most of what's already in the Brent basket. With a refinery slate that leans toward heavier grades such as the bitumen from Canada, there's more U.S. shale oil in the market than the downstream sector can handle.

U.S. crude oil exports over the week ending April 14 averaged 4.5 million BBL/d, about the same as the average production from OPEC-member Iraq. Shipments so far this year have been as low as 2.7 million BBL/d for the week ending April 7 to as high as 5.6 million BBL/d during the last week of February, federal data show.

To discount the strains of the COVID-19 pandemic and the impact of the war in Ukraine, U.S. crude oil exports only managed to reach 3.6 million BBL/d during the first quarter of 2019.

S&P Global Commodities put total U.S. exports at 4.9 million last week, with much of that going to the economies of Europe, China and South Korea. Much of the U.S. crude stays in North America, but with Russia shunned in large part from Western markets, it's taking a larger share in the European economy.

The OPEC+ shock has largely faded away and calls for $100 crude no longer seem to hold merit. U.S. crude, meanwhile, is not a spigot that can turn on and off due to market factors, though market factors do influence drilling and investment appetites. But those factors don't derive from U.S. producers.

The United States, however, easily replaced Russia as the top crude oil export to Europe last year, and the addition of WTI-Midland suggests light, sweet U.S. crude is emerging as the assay of choice for Western markets.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).