Rebalancing global crude supply
A little known Grouchoidian factuelle is… “When most people are successful in passing their driving test, they immediately look for any excuse to drive anywhere for whatever reason as fast and carefree as possible.”
Throw on some World War I aviator goggles and that’s the image, or impression I have of the first three weeks of President Trump tramping his political pedal to the metal. Heaven help those in his way now, or in the future – if there is one.
The members of the OPEC cartel, whom I will now refer to as Cartons, must be muttering to themselves as their plan to “rebalance” global crude supply by, umm… producing less and getting more for the same “less”, just got run over by Trump at the Crosswalk of Economics.
What the Cartons didn’t see coming was being blindsided by the resilience of U.S. Shale production, which is now nearing nine million barrels per day. But this is just a temporary set-back they may say.
I don’t think so.
There are other factors that will force them to revert to Plan B, which is the recently failed market share protection strategy. The driver of these “other factors” is the Trump position on energy independence for the USA, which means the more crude the U.S. produces, the less threats from the Cartons.
They will have noted that both the Keystone XL Pipeline and Dakota Access lines have now been revived, which will boost supply to the Gulf refiners to the tune of 1.3 million bpd. In addition, exploration on U.S. Federal lands has been opened, which may hold as much as 20% of the U.S. total known oil and gas reserves.
To finance $375 million in infrastructure upgrades to the Strategic Petroleum Reserve, the U.S. Government has begun selling crude from its 700 million barrel inventory. This will add 70,000 to 130,000 bpd to global crude inventories for the next five years – decreasing prices, not increasing them.
In their own backyard, Iran, exempt from the production cut agreement, has begun shipping crude to Europe at astounding rates, which will not go over well with their arch rival, the Saudis.
The final blow may come with the rumoured U.S. Border Tax on imported crude and refined products. If this comes into effect, it will increase the cost of any imported crude by an estimated 20%. This will increase demand for the lower cost domestic crude, which will encourage shale oil production.
With Carton crude now over-priced, they, along with all former suppliers to the U.S., including Canada, will be forced to find alternative markets to fill the void.
The final domino falls with a fight for market share. The production cuts revert to a production flood. Crude prices will crash with Mr. Trump, who in my opinion, is guilty of an economic hit and run.
Catch him if you can. But you won’t.
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