The crude oil markets were thrown into a tizzy recently when Bloomberg claimed that the USA had become a net oil exporter for the first time in 75 years. Some market observers pounced on the news, claiming that is was misleading and far from the truth. Others proclaimed it as a show of strength of the American oil industry.
Were both sides correct? Depends on how you interpret the numbers. So lets us break it down.
Surging American production from prolific onshore shale fields have pushed US crude production to record highs, becoming the largest oil producer in the world, ahead of Saudi Arabia and Russia. For the last week of November 2018, the American Energy Information Administration (EIA) reported that US crude output hit a new high of 11.7 mmb/d, up almost 2 mmb/d year-on-year. That this number is surging is surprising to no one, but in the same report, the EIA also showed that the number of oil products supplied to the market – a proxy for crude oil consumption – as 20.5 mmb/d. That’s a gap of 8.8 mmb/d. Add in Other Supply of 6.9 mmb/d – which includes NGLs, fuel ethanol and also refinery processing gains when crude oil gets cracked into a larger amount of fuels – and the gap between oil supply and oil demand is still 1.9 mmb/d. The USA is by no means energy independent yet.
So was Bloomberg wrong? No, but it certainly was being slightly disingenuous. To achieve Bloomberg’s assertion, we have to look at net trade. For the same period, the USA managed to export 3.2 mmb/d - a significant number considering that America’s crude oil export ban was only lifted in 2015 – but imported 7.2 mmb/d of crude. That’s a net import position of 4.0 mmb/d. On the products side, the US exported 5.8 mmb/d of finished products (including gasoline, naphtha, petrochemicals, ethanol and NGLs) while importing some 1.6 mmb/d. That’s a net export position of 4.2 mmb/d.
The comparison of those two net trade numbers could be construed that the US has became a net exporter of 0.2 mmb/d of crude and finished products for the week. This is actually the first time that this number has been in net export since the EIA began reporting in 1991, compared to 2005 when the net import position was at an all-time high of 14.4 mmb/d. But is it correct to conclude that the US is a net exporter of oil from this? Only from one mathematical perspective. For any other direction, the US is still a net importer of 4 mmb/d of crude oil or in a net deficit of oil supply by 1.9 mmb/d.
But misleading or not, though, this is still a major change from even 3 years ago, when the US was a net importer of 9 mmb/d of crude oil or had a net deficit of oil supply of almost 7 mmb/d. And if trends continue to hold, even those numbers could flip soon. Maybe not so soon, but by 2020, they could narrow even further and flip into surplus. Bloomberg’s headline might have been delusive, but the numbers are correct and the trends are clear – the headline is less an assertion and more of a prediction based on very concrete trends.
EIA numbers as of 30 November 2018:
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Technology has indeed changed the way we think, act and react. Every activity we perform is directly or indirectly linked to technology one way or another. Like everything else, technology also has its pros and cons, depending on the way it is used. Since the advancement in cyberspace, scammers and hackers have started using advanced means to conduct fraud and cause damage to individuals as well as businesses online.
According to the Federal Trade Commission (FTC), 1.4 million cases of fraud were reported in 2018 and in 25% of the cases, people said they lost money. People reported losing $1.48 billion to fraudulent practices in 2018. This has caused considerable loss to individuals and businesses. Global regulatory authorities have introduced KYC and AML compliances that businesses and individuals are encouraged to follow. However, banks and financial institutions have to follow them under all circumstances.
KYC or Know Your Customer refers to the process where a business attains information about its customers to verify their identities. It is a complex, time-taking process and customers nowadays don’t have the time or resources to deal with the government, consulate, and embassy offices for their KYC procedures. However, due to technological advancement, the identity verification process has been automated through the use of artificial intelligence systems. These systems seamlessly increase the accuracy and effectiveness of the identity verification process while reducing time and human efforts.
The following methods are used to digitally authenticate identities nowadays:
The use of artificial intelligence systems to detect facial structure and features for verification purposes.
The use of artificial intelligence systems to detect the authenticity of various documents to prevent fraud.
The use of artificial intelligence technology to verify addresses from documents to minimize the threat of fraudsters.
The use of multi-step verification to enhance the protection of your accounts by adding another security layer, usually involving your mobile phone.
The use of pre-set handwritten user consent to onboard only legitimate individuals.
Digital Document Verification
Document verification is an important method to conduct KYC or verify the identity of an individual. The process involves the end-user verifying the authenticity of his/her documents. In banks, financial institutions and other formal set-ups, customers are required to verify their personal details through the display of government-issued documents. The artificial intelligence software checks whether the documents are genuine or have been forged. If the documents are real and authentic, the digital documentation verification is completed and vice versa.
There are four steps that are mainly involved in the digital document verification process. First, the user displays his/her identity documents in front of the device camera. Then the document is critically analyzed by artificial intelligence software to check its authenticity. Forged or edited documents are rejected by the software. The artificial intelligence system then extracts relevant information from the document using OCR technology. The information is sent to the back-office of the verification provider and analyzed by human representatives to further validate the authenticity. Then the results are sent to the business or individual asking for the verification. The whole process takes less than five minutes.
The document authentication process can detect both major and minor faults in the documents. It can detect errors and faults in forged documents, counterfeed documents, stolen documents, camouflage or hidden documents, replica documents and even compromised documents. The verification process can be done on a personal computer or a mobile device using a camera. Although only government-issued documents are used for the authentication process, the following are accepted by most verification providers:
Govt ID Cards
Illegal and fraudulent transactions have dangerous consequences for both individuals as well as businesses. Losses due to scams and frauds trickle down at every level and ultimately have negative consequences on the whole system. Therefore it is imperative to conduct proper customer verification and due diligence in order to minimize the risks of fraud. Digital documentation verification plays a key role in the KYC process.
Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b
Headlines of the week
Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate (WTI) fell from a year-to-date high closing price of $63.27 per barrel (b) on January 6 to a year-to-date low of $20.37/b on March 18 (Figure 1), the lowest nominal crude oil price since February 2002.
WTI crude oil prices have also fallen significantly along the futures curve, which charts monthly price settlements for WTI crude oil delivery over the next several years. For example, the WTI price for December 2020 delivery declined from $56.90/b on January 2, 2020, to $32.21/b as of March 24. In addition to the sharp price decline, the shape of the futures curve has shifted from backwardation—when near-term futures prices are higher than longer-dated ones—to contango, when near-term futures prices are lower than longer-dated ones. The WTI 1st-13th spread (the difference between the WTI price in the nearest month and the price for WTI 13 months away) settled at -$10.34/b on March 18, the lowest since February 2016, exhibiting high contango. The shift from backwardation to contango reflects the significant increase in petroleum inventories. In its March 2020 Short-Term Energy Outlook (STEO), released on March 11, 2020, the U.S. Energy Information Administration (EIA) forecast that Organization for Economic Cooperation and Development (OECD) commercial petroleum inventories will rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019 (Figure 2). Since the release of the March STEO, changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater than EIA’s March forecast.
Significant price volatility has accompanied both price declines and price increases. Since 1999, 69% of the time, daily WTI crude oil prices increased or decreased by less than 2% relative to the previous trading day. Daily oil price changes during March 2020 have exceeded 2% 13 times (76% of the month’s traded days) as of March 24. For example, the 10.1% decline on March 6 after the OPEC meeting was larger than 99.8% of the daily percentage price decreases since 1999. The 24.6% decline on March 9 and the 24.4% decline on March 18 were the largest and second largest percent declines, respectively, since at least 1999 (Figure 3).
On March 10, a series of government announcements indicated that emergency fiscal and monetary policy were likely to be forthcoming in various countries, which contributed to a 10.4% increase in the WTI price, the 12th-largest daily increase since 1999. During other highly volatile time periods, such as the 2008 financial crisis, both large price increases and decreases occurred in quick succession. During the 2008 financial crisis, the largest single-day increase—a 17.8% rise on September 22, 2008—was followed the next day by the largest single-day decrease, a 12.0% fall on September 23, 2008.
Market price volatility during the first quarter of 2020 has not been limited to oil markets (Figure 4). The recent volatility in oil markets has also coincided with increased volatility in equity markets because the products refined from crude oil are used in many parts of the economy and because the COVID-19-related economic slowdown affects a broad array of economic activities. This can be measured through implied volatility—an estimate of a security’s expected range of near-term price changes—which can be calculated using price movements of financial options and measured by the VIX index for the Standard and Poor’s (S&P) 500 index and the OVX index for WTI prices. Implied volatility for both the S&P 500 index and WTI are higher than the levels seen during the 2008 financial crisis, which peaked on November 20, 2008, at 80.9 and on December 11, 2008, at 100.4, respectively, compared with 61.7 for the VIX and 170.9 for the OVX as of March 24.
Comparing implied volatility for the S&P 500 index with WTI’s suggests that although recent volatility is not limited to oil markets, oil markets are likely more volatile than equity markets at this point. The oil market’s relative volatility is not, however, in and of itself unusual. Oil markets are almost always more volatile than equity markets because crude oil demand is price inelastic—whereby price changes have relatively little effect on the quantity of crude oil demanded—and because of the relative diversity of the companies constituting the S&P 500 index. But recent oil market volatility is still historically high, even in comparison to the volatility of the larger equity market. As denoted by the red line in the bottom of Figure 4, the difference between the OVX and VIX reached an all-time high of 124.1 on March 23, compared with an average difference of 16.8 between May 2007 (the date the OVX was launched) and March 24, 2020.
Markets currently appear to expect continued and increasing market volatility, and, by extension, increasing uncertainty in the pricing of crude oil. Oil’s current level of implied volatility—a forward-looking measure for the next 30 days—is also high relative to its historical, or realized, volatility. Historical volatility can influence the market’s expectations for future price uncertainty, which contributes to higher implied volatility. Some of this difference is a structural part of the market, and implied volatility typically exceeds historical volatility as sellers of options demand a volatility risk premium to compensate them for the risk of holding a volatile security. But as the yellow line in Figure 4 shows, the current implied volatility of WTI prices is still higher than normal. The difference between implied and historical volatility reached an all-time high of 44.7 on March 20, compared with an average difference of 2.3 between 2007 and March 2020. This trend could suggest that options (prices for which increase with volatility) are relatively expensive and, by extension, that demand for financial instruments to limit oil price exposure are relatively elevated.
Increased price correlation among several asset classes also suggests that similar economic factors are driving prices in a variety of markets. For example, both the correlation between changes in the price of WTI and changes in the S&P 500 and the correlation between WTI and other non-energy commodities (as measured by the S&P Commodity Index (GSCI)) increased significantly in March. Typically, when correlations between WTI and other asset classes increase, it suggests that expectations of future economic growth—rather than issues specific to crude oil markets— tend to be the primary drivers of price formation. In this case, price declines for oil, equities, and non-energy commodities all indicate that concerns over global economic growth are likely the primary force driving price formation (Figure 5).
U.S. average regular gasoline and diesel prices fall
The U.S. average regular gasoline retail price fell nearly 13 cents from the previous week to $2.12 per gallon on March 23, 50 cents lower than a year ago. The Midwest price fell more than 16 cents to $1.87 per gallon, the West Coast price fell nearly 15 cents to $2.88 per gallon, the East Coast and Gulf Coast prices each fell nearly 11 cents to $2.08 per gallon and $1.86 per gallon, respectively, and the Rocky Mountain price declined more than 8 cents to $2.24 per gallon.
The U.S. average diesel fuel price fell more than 7 cents from the previous week to $2.66 per gallon on March 23, 42 cents lower than a year ago. The Midwest price fell more than 9 cents to $2.50 per gallon, the West Coast price fell more than 7 cents to $3.25 per gallon, the East Coast and Gulf Coast prices each fell nearly 7 cents to $2.72 per gallon and $2.44 per gallon, respectively, and the Rocky Mountain price fell more than 6 cents to $2.68 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.8 million barrels last week to 64.9 million barrels as of March 20, 2020, 15.5 million barrels (31.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.3 million barrels, and Rocky Mountain/West Coast inventories decrease by 0.2 million barrels. Midwest inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane/propylene inventories.
Residential heating fuel prices decrease
As of March 23, 2020, residential heating oil prices averaged $2.45 per gallon, almost 15 cents per gallon below last week’s price and nearly 77 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.11 per gallon, almost 14 cents per gallon below last week’s price and 98 cents per gallon lower than a year ago.
Residential propane prices averaged more than $1.91 per gallon, nearly 2 cents per gallon below last week’s price and almost 49 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.42 per gallon, more than 7 cents per gallon lower than last week’s price and almost 36 cents per gallon below last year’s price.