It will soon be a month since OPEC and Russia began to cut production to reduce surplus supply and, while the price of oil has risen $10 a barrel so far this year, it seems to be struggling to gain a footing above the $60 a barrel mark. Whether potential US sanctions on Venezuelan oil exports or the recent closure of Libyan ports, nothing has so far been able to genuinely push prices up. Multiple risks – of an economic slowdown in China, a US/China trade war or a financial and economic crisis – are often held up as brakes on a rise in prices. But another factor, that has so far received little attention in the press, could also be weighing on the global oil market in the short term.
Since November, the southern United States has been drowning in a sea of petrol. Petrol stocks have increased significantly in the region since November, reaching a level not seen any time in the last seven years. This quite exceptional situation is a result of growth in shale oil production and its refining in the southern US. US shale oil is a light oil which, when refined, mainly yields petrol. Increased oil production in the second half of 2018 drove southern refineries to operate at almost full capacity. But demand for petrol has not grown as fast as demand for diesel. The situation in the southern US is complex: diesel stocks are at rock bottom, while petrol stocks are sky-high. While refining more oil would certainly increase diesel stocks, it would also contribute to petrol production.
This significant surplus of petrol in the US and Texas is in stark contrast to the shortage in Mexico. Refineries along the Gulf Coast have reduced their oil refining volumes since the beginning of 2019. To avoid petrol storage capacity being totally saturated, refineries have no option but to reduce their output. As long as petrol stocks remain high, US oil will either continue to inflate them or will have to be exported. Whereas oil stocks usually decline over the final quarter of the year, they increased in the south in 2018 and have continued to build up in the new year. Exports alone are not enough to shift the excess oil. Increased stocks in the southern US are thus pulling down WTI prices (the benchmark for US oil prices). The need to export shale oil is limiting the extent to which Brent – another light oil that serves as the international benchmark for oil prices – can rise.
It will be important to keep a close eye on the supply-demand balance in the southern US over the coming weeks. Export capacity is unlikely to increase significantly in the short term. Efficiency gains have been realised in the tanker loading process, but this will not necessarily be enough to shift the glut of oil and petrol: that would, among other things, take new terminals able to receive supertankers. For the time being, new export terminals are at planning stage, and the US federal shutdown is likely to delay their Delivery.
Beyond this, however, the situation in the southern US prompts consideration of how the energy transition might be realised. It is important that steady progress be made in seeking substitutes for the various "cuts" of oil (petroleum products obtained after oil has been through the fractional distillation process). Focusing solely on personal mobility without finding technically and economically viable solutions for aircraft kerosene or the naphtha* needed by the petrochemical industry will only give rise to larger-scale versions of the kind of situation we are seeing in the southern US. Let us go further: if cars are set to become electric while kerosene extracted from the oil refining process remains the only fuel that can fly aircraft, the world is going to end up having huge volumes of petrol and diesel on its hands.
Stéphane Ferdrin - stéphane.firstname.lastname@example.org
* Naphtha is a "light" cut produced from condensed crude oil vapour, used in the petrochemical industry.