US and OPEC lock horns: Will oil importers benefit?

It’s been a chest thumping moment for the US.

But, for OPEC, it could turn out to be a heart-wrenching moment.

Has crude oil turned into a zero-sum-game, finally?

At a time when OPEC (Organization of Petroleum Exporting Countries) has decided to cut its production by 1.2 million barrels a day, the US has turned a net exporter of oil for the week ended on November 30, 2018.

Story in detail…

OPEC has been finding itself in a catch 22 situation quite often these days. If it decides to support falling oil prices, it might lose its market share and if it decides to retain market share, the OPEC members and allies might end up upsetting their budgets.

US oil imports: Falling off a cliff
OIL

 

(Data Source: EIA Image: Ventura Securities)

Against the backdrop of trade war tensions between the US and China, the US is turning into a net exporter of oil and this may have bigger implications on global trade.

Here’s how…

The world’s largest economy ran deficits of US$ 566 billion with the world in 2017—the highest level since 2008. However, it’s noteworthy that, as per the Department of Commerce, the US recorded a deficit of US$ 375 billion with China alone—the highest ever—in 2017.

The US has been insisting that China should reduce its trade surplus with the US by US$ 200 billion by 2020. Does that mean China will have to import more oil from the US?

Maybe that’s the implied message of the Trump administration.

OPEC’s recent decision to cut oil production suggests that the members are reluctant to take a knock on their budgets. But if the brent crude oil prices keep rising, the West Texas Intermediate (WTI)-benchmarked oil may become attractive to Asian importers, including India.

Despite higher prices, Indian refiners prefer Brent crude over WTI oil due to higher landing costs. The US has been using the carrot and stick approach to woo oil importers.

With huge pipeline capacity (nearly 2.6 mb/d) coming online over the next 2 years, Permian oil production (in the US) may continue to boom. As a result, OPEC might lose more market share.

On the other hand, bromance between OPEC and its allies had been making major oil importing nations uncomfortable. But the presence of another strong exporter such as the US might change the market dynamics.

Major oil importers such as China and India have been actively looking to work with a strong non-OPEC supplier to gain some bargaining power.

Will China become an even bigger importer of WTI oil?

export destinations.png

(Source: EIA)

Importing more oil from the US might also help countries like India and China to reduce their trade deficits with Uncle Sam—an essential step to preserve their export markets in the era of trade wars.

In a nutshell…

Although the US might still remain a small net importer of oil, its growing dominance will take away OPEC’s upper hand. Is the oil market turning from a seller’s market to a buyer’s market?

It looks like…for now.

Oil exporting nations once demanded gold against oil, then they settled for US$s in exchange for black gold.

Recently, India and UAE signed a pact to eliminate the US$ from the trade.

So, it looks like happy days are in sight for large oil importers!

Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. Information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.

 

 

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