The dramatic shift in the US energy balance as a result of shale gas/oil fracking technology is a theme I’ve often highlighted, and the chart below has global ramifications across many industries. US oil imports will fall to their lowest level for more than 25 years next year according to the US Energy Information Administration (EIA). Net imports of liquid fuels, including crude oil and petroleum products, would fall to about 6m barrels per day in 2014, their lowest level since 1987 and only about half their peak levels of more than 12m during 2004-07. The figures reflect the spectacular growth of US production thanks to the unlocking of “tight oil” reserves using hydraulic fracturing and horizontal drilling in states led by North Dakota and Texas.
The declining US dependence on imports will reduce the trend current account deficit and offer long-term support to the USD, increase resilience to crude price shocks and generate high paying jobs in the energy sector directly (and the highest paying non-graduate jobs in the US right now are in North Dakota, so long as you don’t mind living in a trailer) and in associated industries such as rig engineering and construction. In contrast to consensus IB forecasts, the EIA also expects increased US production to put downward pressure on oil prices, with Brent crude dropping from a record average of $112 per barrel last year to $99 in 2014.
US crude production fell to just 5m bpd in 2008, but rebounded to 6.43m last year and is expected by the EIA to rise to almost 8m in 2014. At the same time, consumption has been falling, from 20.7m b/d, for all liquid fuels, in 2007, to 18.7m last year. The EIA expects that the US will still use less oil in 2014 than in 2011, as conservation efforts (notably a far more fuel efficient car fleet) pay dividends. The surge in production in the US has led some forecasters, including the International Energy Agency, to predict that it will overtake Saudi Arabia and Russia to become the world’s largest oil producer by the end of the decade. The EIA has been cautious about endorsing the more euphoric forecasts, which depend on factors that are difficult to predict including Saudi production spare capacity growth, stability in Iraq etc. The US will still next year be importing about as much oil as at the time of the shocks of 1973-74, and even if the US becomes completely self-sufficient in oil, it will not be able to ignore the potential threat to the world economy created by price rises and supply disruptions, and so would still have an interest in sustaining production in the Middle East.
In the 15th November weekly, I noted that: Coal’s share of total US electricity generation has dropped by more than 10% in the last four years, replaced by NG. And US coal production this year is expected to drop by 7%, despite surging exports, notably to Europe. Dirt-cheap NG prices have caused a major slowdown in drilling activity, which will help ease the supply glut that has plagued gas producers during the past several years, and is reflected in a 25% price jump in recent months while thermal coal languished below $80/tonne. The switching terms from coal for US power plants, having been compelling, have reversed since then. Added support comes from power demand bottoming in China.’ The US Energy Department forecasts that the average spot price of natural gas will hit $3.68 in 2013, making current thermal coal prices highly competitive for power generators while China looks set to import 240-50 million metric tons of thermal next year, or 10% more than in 2012 at a time when the US exportable surplus is shrinking.
Since the end of October, benchmark prices have risen around 10% with thermal coal from South Africa’s Richards Bay trading at $88 a ton. Although China’s immediate appetite for coal may be muted with above average stockpiles, prices should be buoyed by seasonal restocking across the Northern Hemisphere in coming months. The price for top-grade coal should break $100 a ton by end Q1, and indeed an average thermal coal price of $100-110 a ton for 2013 is feasible, from recent lows sub $80.
Resurgent North American oil production is finally being matched by increases in pipeline capacity, releasing ‘trapped’ domestic supply onto the global market. As shale oil production surges, drillers and refiners have used trains, barges and trucks to move oil from remote mid-Western fields to coastal refineries but all are more expensive than pipelines. The Association of Oil Pipe Lines estimates that new US pipeline capacity totalling 500,000 bpd came into operation last year while US crude output rose 780,000 bpd. It’s a good bet that the WTI-Brent price gap, which has been running at $20-30 in recent months, will close toward $10 over the next 12mths or so. The new Seaway pipeline is set to almost treble capacity from Cushing, Oklahoma, the delivery point for WTI oil futures contracts, to the Gulf of Mexico export terminals, helping drain record stocks at Cushing, which have artificially depressed the WTI price.
Meantime, while gasoline prices dropping about 50c a gallon in recent months are a discretionary spending windfall for US consumers, broad credit and money supply trends in the US also remain supportive, with three month moving average growth of just sub 6% in total bank credit and over 8% in commercial and industrial loans. We’ve also seen four straight months of impressive gains in overall consumer credit. Consumer credit increased more than forecast again in November, led by borrowing for student loans and auto loans; the $16bn gain followed a $14.1bn advance in October. With sustained if modest gains in the labour market and strong demand for student loans and autos, consumer credit should grow further in Q1. Easing bank lending standards combined with an improved labour market suggests that consumer spending can withstand the 2% payroll tax hike from the fiscal cliff deal.