Dave Ernsberger, Global Editorial Director Oil, Platts in an exclusive analysis of the United States Congressional deal to lift existing restrictions on US crude exports. The deal unveiled by US Congressional leaders to lift longstanding restrictions on US crude exports comes as a big surprise to world oil markets, where conventional wisdom has broadly been that the walls built 40 years ago around the US crude oil market were there to stay.
This agreement, tagged on to a massive government-spending bill, is historically important for producers, refiners, distributors and consumers of oil in the US. It also poses important new questions for the rest of the world, where the US could, intriguingly, be jostling with Iran as the latest member of a cast of oil producers looking to find a home for surplus crude oil in, a world currently awash with oil. Let’s look at some of the most immediate and important impacts of the deal. A transformational moment for WTI Firstly, this is a transformational moment for the WTI crude oil benchmark.
WTI is unequivocally back on the world stage as a major force in global crude oil pricing. As a glance at ten years of history of the Brent/WTI spread shows, WTI was driven into the wilderness by the effective ban on US crude exports, struggling to serve as a reflective price reference for all but US oil refiners with access to US crude oil. WTI reflected the value of US crude well, but US crudes weren’t reflecting what was happening in the rest of the world. World oil markets surged to more than $5/barrel above WTI at the start of 2011. At the heights of US oversupply, with no export markets available and some key US crude pipelines ready to send crude towards US storage instead of taking it away, WTI in Cushing, Oklahoma could be bought for discounts of $25/barrel or more compared to global crude prices. Markets adjust to changes in supply and demand quickly. Recently, we have seen the Brent/WTI spread narrow to barely pennies. For some months along the forward curve, WTI has even traded above Brent.
Our analysts at Bentek Energy, a unit of Platts, are revisiting their price forecasts in the wake of these new market developments. And with open-ended exports now suddenly on the table, it seems likely that WTI will now serve as a price benchmark that is plugged right back into the world. Winners and losers There are also clear trade flow implications. If you are a US producer of crude oil, you’re likely to feel like a winner out of all of this. Markets beyond US shores will be open to US producers for the first time, easing the pressure to sell at steep discounts to US refiners. While big producers might have been well placed to weather the storm of lower prices through sheer scale and sophisticated risk management techniques, this is especially important for smaller producers weighing up their next steps.
Hundreds of thousands of US stripper wells, each of which is small but with combined production totalling 1 million b/d of crude, are at risk if oil prices fall to the low 30s per barrel, the US’ National Stripper Well Association said this week. If you are a US refiner, the news will be less welcome. US crude may be still be discounted to a point because it will always be logistically more compelling to deliver to a US refiner than to put oil on a tanker destined for far flung parts of the planet. But the generous margins enjoyed by US refiners will now likely become something of a memory.
East Coast Bakken refining margins have already dipped into the red a few times this year. Our view is that East Coast refiners are likely to be most hurt by unfettered US crude exports. Crude that is today shipped by rail from the Bakken to the East Coast may now more cheaply be sent by pipe to the US Gulf Coast and exported. Moreover, shipments of Gulf Coast crude to the East Coast by tanker will still need to be shipped on Jones Act-compliant ships, which may be more expensive than a vessel flying another nation’s flag and therefore heading out of the US.
These may be some of the reasons why Republicans included a provision in the bill that will expand a manufacturer’s tax deduction to cover 75 per cent of an independent refiners’ crude shipping costs. Our analysts at Bentek reckon that with that provision, it may remain cheaper to ship Bakken crude to the East Coast by rail than by pipe to the Gulf Coast. Shipping by rail would be about $3/b to $3.50/b with the tax break, while shipping by pipe to the Gulf Coast would be about $8.50/b to $9/b.
For both US crude producers and refiners, local crude price differentials will become much more important. When refining profits are more in line with the tough margins in the rest of the world, producers and refiners will be watching WTI basis differentials with an eagle eye. US crude exports Finally, let’s turn to the likelihood of a US exports boom, the focus of attention for the rest of the world. Outside the US, there is a sense that US oil might be about to start competing with you, or competing to supply you.
But how likely are things to change, really? For a start, the US has already been supplying millions of barrels per day of diesel, gasoline, LPG and lightly treated condensates to the world for several years already, For a country with a reputation for having a crude ban in place, the US already exports more crude than most non-OPEC nations. Thanks to approved licenses to export, primarily to Canada, the US regularly exports close to half a million barrels per day of crude oil. Comparing this to previous years, we can see that the US has already become a major crude exporter, almost by stealth. Theoretically, unfettered US crude exports could begin shortly after Obama signs the bill into law. Economically, that probably doesn’t make sense. If we remove exports to Canada, we can see that licensed US crudes have so far struggled to find markets outside of Canada.
Most of these destinations like Switzerland, Singapore, South Korea, and the Mediterranean are already well served with supplies closer to hand. US crude exports are already well below the recent peak of 600,000 barrels per days. Markets move quickly, and we believe that the steadily narrowing Brent/WTI spread of recent months has already generated stiff headwinds for US exports, even before exports are fully liberalized. Most likely the biggest impact on exports of this deal is that recent clearance granted to export plant condensates will become redundant and relatively complicated arrangements like the Obama administration’s October approval for Mexico’s Pemex to swap up to 75,000 b/d of its heavy Mexican crude for an equal amount of US light oil, will simply fall by the wayside, overtaken by full liberalization.
In case US exports do somehow begin to surge, we shouldn’t forget that provisions have been made for controls to be brought back into place if things seem to be getting too hot. The recent deal allows any president of the US to impose export-licensing requirements on crude for up to a year at a time if certain conditions are met. These conditions include national emergencies, sanctions, supply shortages and sustained high domestic oil prices, according to the bill. In conclusion, within the US, there will be big winners, most prominently the WTI benchmark, and some who experience real pain, like US refiners. In the main, and as is often the case, the world’s markets seem to have priced most of these developments in, already. Economically viable oil exports found their way to market either through deals with Canada or as refined products.
It seems more likely that refiners in Europe and Asia will be weighing up offers to buy crude from Iran and Iraq long before they turn their attention to what it would cost to get their hands on big volumes of Eagle Ford Shale, or any other US crude or condensate. This particular deal is a once-in-a-generation shift in the world oil markets. The lifting of crude export will long be remembered as an exclamation mark, powerfully punctuating the end of the US’ remarkable mental journey from oil importer to oil exporter, and serving as a call to the rest of the world to be ready for a new US mindset, when prices do eventually recover. – See more at: http://www.ogronline.com/Article/newsmid/135/newsid/465/feature/Transformational_move#cnttop
