Soaring U.S. Crude Production Fuels Export Boom

U.S. oil production reached a record 13.2 million barrels per day, significantly increasing exports, especially to Europe and Asia.
End-of-year tax considerations are prompting traders to export more oil to reduce taxable inventory, with exports expected to average 5 million barrels per day.
The integration of WTI Midland in the Brent basket and the European embargo on Russian oil have contributed to the growing popularity of U.S. crude in global markets.

Record-high crude oil production is driving a record in crude oil exports, too, as traders rush to rid themselves of inventory that they would otherwise have to pay taxes on.

Reuters reported this week that average crude oil shipments abroad from the Gulf of Mexico have averaged some 4 million barrels daily since the start of the year. This is half a million barrels per day over last year’s average.

U.S. crude oil production recently hit an all-time high of 13.2 million barrels daily, according to the Energy Information Administration, whose latest confirmed data is for September. This is driving higher exports for Europe and Asia.

“Flows bound for Asia are looking to finish the year strongly, particularly for cargoes heading to China,” Kpler’s Matt Smith told Reuters. In fact, rising U.S. exports of crude oil to Asia were one reason, according to Bloomberg, that Saudi Arabia cut its oil prices for Asian buyers earlier this month. The intensifying competition from U.S. barrels seems to be pressuring the world’s top exporter to fight for its market share.

Now, the end of the year is adding another motive for oil sellers to be quick about placing as many barrels as possible on tankers bound for Asia or Europe. Tax season is upon them, and the less oil they have in inventory as 2023 ends, the less they will pay in taxes. As a result, Kpler’s Smith expects U.S. oil exports to end the year on a high note, at an average daily of 5 million bpd.

U.S. crude oil is shaping up as the biggest reason for the moderation in oil prices this year. With its main markets in Europe and Asia, exported crude from the world’s top producer has proved a useful lever for keeping a lid on benchmarks even as Saudi Arabia and Russia reduced their production, especially the former.

The addition of WTI Midland to the Brent basket was a big reason for that surge in U.S. oil exports and, in turn, their moderating effect on global prices.

“As Midland becomes more and more important in the dated Brent assessment, it has a knock on effect on other grades having to price themselves lower to compete with WTI Midland,” Vortexa market analyst Rohit Rathood told Reuters in August this year.

Midland is the cheapest grade included in the Brent basket, and this has been instrumental in making U.S. crude more popular, along with Europe’s embargo on direct Russian oil flows.

The record exports will probably decline in January after tax season is over. Yet chances are they will remain much stronger than before as production continues to climb higher, albeit at a slower pace, at least according to the EIA. The agency has forecast that U.S. oil output will add some 180,000 bpd next year as opposed to 1 million barrels daily this year.

It may yet surprise to the upside, however. Forecasts for this year were that U.S. output would reach 12.5 million bpd in the final quarter. Yet actual output has significantly exceeded this, even at lower rig counts, to the surprise of many industry observers. Drillers themselves attributed this to improvements in drilling efficiency. These may continue, complicating OPEC+’s task of maintaining control of global oil prices. Unless they decide on a repeat of the 2014 flooding strategy that saw prices tank and dozens of U.S. drillers go under.

Should this happen—and some energy analysts predict it may—there would be fewer U.S. drillers to be affected by the move, and they would be more resilient as the industry matures and consolidates. This time, the flooding strategy may backfire.

By Charles Kennedy for Oilprice.com