U.S. Oil Production
As the U.S. has become the world’s biggest oil producer, exceeding output from both Russia and Saudi Arabia, the global oil supply glut has been working against oil companies by keeping crude prices low. In September, the U.S. posted a record trade surplus in petroleum products and exported oil to a record number of global destinations (Toy, 2019). Energy analysts have yet to determine if a rise in U.S. crude inventories is a result of excess supply or a signal that refining activity has slowed. At roughly $53.93 a barrel on the New York Mercantile Exchange, oil prices are still 19% below this year’s April peak on concerns that weak global demand and a rise in production has resulted in a supply glut (Ramkumar, 2019).
Surging Inventories and Falling Energy Stocks
During the middle of October, the Energy Information Administration displayed figures that showed how U.S. crude inventories surged by 9.3 million barrels, which is much higher than the 2.3-million-barrel increase that was expected by Wall Street analysts (Ramkumar, 2019). The rise in crude production has reduced gas and diesel prices for consumers and manufacturers but has had an adverse impact on jobs and economic activity within the fossil fuel industry. Energy stocks in the S&P 500 have dropped over 12% in the past year and are the only sector in the stock market to decline over that period of time (Toy, 2019).
The Export Ban
In 2015, U.S. oil production started to ramp up after Congress agreed to remove a 40-year ban that would allow U.S. oil companies to export oil to the global marketplace. Energy analysts predicted that when the U.S. started to export oil globally, it would have a regulating effect on the global oil market that would cushion the impact of supply interruptions in other parts of the world. However, following the September attacks on Saudi Arabia’s state-owned Saudi Aramco oil processing facilities, oil prices still surged more than 15% in one day, which is the biggest one-day move on record (Toy, 2019). Although, shortly after the attack, oil prices fell again to levels seen prior to the attack after investors acknowledged that weak global demand for oil and rising exports in the U.S. would counteract the production loss experienced by Saudi Aramco.
A major paradigm shift has occurred as the U.S. has entered the global export market. While American oil companies had lobbied Congress for years to lift the oil export ban, the flood of new oil in the global marketplace has weakened oil prices and has discouraged investors from making new investments in energy companies. Private-equity companies that made investments in the oil industry during the first phase of the American export boom have been struggling to make a return on their investment as a result of the depressed oil prices (Toy, 2019). The current oil-supply outlook is a clear departure from the early 2000s, when crude prices skyrocketed as producers struggled to keep up with the increasing demand in China and energy analysts warned of peak oil (Krauss, 2019). While oil will continue to remain as the biggest contributor to the global energy portfolio, the flood of American export is predicted to keep oil prices low for the foreseeable future.
Krauss, C. (2019). “Flood of Oil Is Coming, Complicating Efforts to Fight Global Warming.” The New York Times: https://www.nytimes.com/2019/11/03/business/energy-environment/oil-supply.html
Ramkumar, A. (2019). “Surging Crude Inventories Add to Mixed Oil-Market Signals.” The Wall Street Journal: https://www.wsj.com/articles/surging-crude-inventories-add-to-mixed-oil-market-signals-11571327980
Sharma, G. (2019). “OPEC Sees Flood Of U.S. Shale Barrels Hurting Demand For Its Crude Oil.” Forbes: https://www.forbes.com/sites/gauravsharma/2019/11/05/opec-sees-flood-of-us-shale-barrels-hurting-demand-for-its-crude-oil/#11dc946574b7
Toy, S. (2019). “U.S. Oil’s Growth Challenges Investors.” The Wall Street Journal: https://www.wsj.com/articles/u-s-oils-growth-challenges-investors-11573387200