Oil prices may be going down, but they are not going away.
Good morning my teeming millions and welcome to Thursday. Call it the Lunar New Year yips or the President’s Day decline, but we’re not getting our late week rally. Even though the United States showed a decline instead of an increase in our crude stockpiles (-800K), there was a build in Cushing (+500K) and that might be enough to push us down. Well, I’ll tell you my thinking, the market has it all wrong.
For what it’s worth, Brent should be at a discount to the WTI, but it’s hard to fight all those hanging on and hoping for more. Their day will come and it’s not going to be pretty. Giving up on $100 oil was hard for me a few years ago and those that still have faith that Brent should be worth that much more than WTI are just as stubborn.
The thing is that the United States is always in need of oil. For all the traders that are still playing the WTI/Brent arb and rocking profits shorting U.S. crude, they are living on the edge of madness. The seemingly artificial premium that Brent is trading to WTI is only hurting foreign oil producers. Because Brent is the higher crude benchmark, that’s leaving foreign crude producers hard pressed to find buyers when the export market for U.S. crude is wide open.
Then there’s the matter of refining that crude. With U.S. demand still trying to find more solid ground, there’s no need to import products. Combine that with the much weaker margins for foreign refiners that are stuck with the price of Brent, they end up on the losing end too. We’re finding less wiggle room for foreign oil producers than the back pocket of Jennifer Lopez’s jeans.
Now comes the reality of the fallacy; U.S. crude producers are not going to stop. Everyone make be waiting on the “fail for shale”, but America is doing what it does best; adapt, improvise, overcome. The last thing we’re going to do is spend budget on foreign crude at a premium when we have plenty here. The challenge is to find ways to make it and even import it cheaper.
If you look at last week’s stats, you see that for the second week in a row we’ve brought in record high levels of crude from Canada (3.4M b/d), but last week that number might have offset a lot of barrels from the Saudis (-248K; 696K b/d). Overall, we dropped OPEC crude down to just over 2M b/d (2.065). Granted during this time last year we saw OPEC imports drop to around this number, but we’re pulling in over 200K b/d more from Canada for 2016. Can you smell what The Rock is cookin’? We’re shifting away from those foreign barrels and focusing on North America.
This year it’s an increase from Canada to make up for heavy barrels, next year we may see even more OPEC crude replaced by Mexico. No matter how low crude goes, America still needs more than anyone else in the world. This isn’t about an oil glut, this is about the independence and security of American energy. At this pace and price it’s likely that we’re going to see North America become self sufficient on oil and have enough to provide for the Western hemisphere. On the other side of the world, money and time is something those oil producers can’t afford.
Fall as it may, it’s just like the song says, “Nobody does it better…”