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U.S. Crude Export to Asia Swells: Is OPEC Losing the Game?

Zacks

The increase in oil exports from the United States into the Asian markets can put pressure on the world markets as the supplies from OPEC may eventually be replaced with that of the United States.

U.S. crude oil exports to Asia last week hit the highest in two months, and the second-highest on record, at 877,000 barrels per day (bpd), according to data from Kpler. Of the total export, South Korea was the biggest buyer with imports of 357,000 bpd. It was followed by China and India who had imports of 222,000 bpd and 151,000 bpd, respectively. Indonesia and Japan were close with imports of 99,000 bpd and 47,500 bpd, respectively. In the first three weeks of November, the average export rate for U.S. crude to Asia was at 470,330 bpd.

Reasons Behind Growing U.S. Exports

There are two mains reasons behind the spur in US exports over the last few years.

In 2015, Washington lifted the forty-year old ban on oil exports. Per CNBC, the United States has never exported more than 2 million barrels of crude oil per day. During the week through Oct 27, the nation exported 2.13 million barrels a day of light oil, higher than 400,000 barrels shipped at the end of 2015.

On Nov 30, 2016, OPEC signed a landmark deal to curb oil output by 1.2 million barrels a day. Following the footsteps of the cartel, non-OPEC players headed by Russia decided to lower oil output by 558,000 barrels per day in December 2016.

Collectively, they decided to reduce crude production by 1.8 million barrels each day. On May 25, the cut in oil production was extended until the first quarter of 2018. It is expected that OPEC can extend the agreement through the end of 2018.

On Nov 30, OPEC and non-OPEC players will hold a meeting to decide on an extension of the crude production cut accord beyond first-quarter 2018. More than 20 oil producers, including leading exporters like Russia and Saudi Arabia, will participate in the Vienna meeting. The agreement entails putting roughly 1.8 million barrels a day of crude oil out of the market.

It can be assumed that the United States is gaining an edge over OPEC in the global crude market especially in Asia, considering that the cartel is lowering supplies to major crude buyers in compliance with the accord.

Why the Interest in U.S. Crude?

There are three main reasons behind the surging demand for U.S. crude. The crude is appropriate with the configuration of Asian refineries. These refineries process high quality so-called light, sweet crude that produce petroleum products such as gasoline and diesel.

U.S. crude is less expensive as the WTI trades at a steep discount to other oil benchmarks like Brent.

The cargoes are bought on a spot basis, providing refiners flexibility to balance the conventional Middle Eastern supplies that are sourced via long-term contracts.

Other Reasons

Political reasons also at play for this boom in US exports to Asia, per oil traders and refining executives. Sources believe that all regions including Tokyo, Beijing and Asian governments are trying to improve trade relationship with America. Hence, buying crude from the nation is considered a medium to promote the relationship with Washington.

Gainers

As per rig count data provided by Baker Hughes, a GE company, total U.S. drilling rigs increased dramatically from 404 — the lowest hit in May, 2016 — to 923 as of Nov 22, 2017. The current nationwide rig count is considerably higher than the prior-year level of 588. This signifies that more shale players have gathered in the United States, which has led to higher U.S. oil production and export.

Growing crude export is expected to benefit shale players like EOG Resources, Inc. EOG, Whiting Petroleum Corp. WLL, Exxon Mobil Corp. XOM, Apache Corp. APA and Pioneer Natural Resources Co. PXD.

These players will be able to sell their production. Amid low oil prices, these companies will benefit from low cost and high yielding assets.

Pipeline companies like Enterprise Products Partners L.P. EPD and Enbridge Inc. ENB are expected to gain from increasing exports.These companies will witness an increase in transportation activities. The companies’ operations were hampered after the oil crash, which resulted from sluggish activities and lower oil demand.

Pioneer holds a Zacks Rank #2 (Buy) while EOG Resources, Whiting Petroleum and Apache carry a Zacks Rank #3 (Hold). ExxonMobil — the largest publicly trading oil company — sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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