High days and holidays for US crude flows

The US remains poised to continue its emergence as a major player on the world oil supply stage, writes John-Laurent Tronche

The floodgates have opened. The game has changed. The possibilities are endless. Choose any of those expressions or phrases to explain some aspect of the global oil market—a market featuring US exports, OPEC cuts, an improving world economy, yet declining oil demand long-term.

For US oil producers the picture is clear at least, it’s a bright future ahead. US crude prices are at multiyear highs despite North American oil production that shows little sign of slowing down.

That is especially true in the US Gulf Coast, where demand for every barrel heavy or light, sour or sweet, continues to be robust. As an example, take prices for the regional medium sour blend LOOP Sour, which reflects the value of crudes most-consumed by the massive US Gulf Coast refining sector. LOOP Sour was trading at the beginning of Q4 at a roughly $2/b premium to the underlying market of cash West Texas Intermediate at Cushing, Oklahoma. Six months earlier, it was closer to cash WTI minus $2/b.

That US crude prices could make such a rebound from early 2016’s bear market is remarkable, but the result of improving drilling economics and a global sour crude shortage brought on by the ongoing production cuts by OPEC members and non-OPEC countries. As Arab Medium barrels, for example, have become harder to source, US crudes have stepped in to fill the need.

Demand for LOOP Sour has increased as competition grows for regional medium sours such as Mars and Poseidon. LOOP Sour million barrels per month in Q3 compared with 608,000 barrels per month in Q2 and 990,000 barrels Louisiana Offshore Oil Port, which manages the cavern and other caverns and tanks with a combined capacity of about 72 million barrels.

US crude exports to average 2 million b/d by 2019

It has been two years since the US reversed its 40-year stance effectively prohibiting exports of domestically produced crude oil; however, that decision made in December 2015 was in reality several years in the making. The first crack in the ban was mid-2013, when the Eagle Ford shale play of South Texas and the Bakken field in North Dakota combined reached 2 million b/d of crude output. The US market was awash in crude, and it was at this time crude by rail dominated headlines and oil made its way across the border to Canada at heavily discounted prices.

About one year later, the US Department of Commerce added another crack, OK-ing the export of lightly treated condensate. Eagle Ford molecules were available to the rest of the world as production there continued to climb.

Finally, the floodgates were opened in December 2015 with the end of crude export restrictions. It took some time for companies to get their bearings, but the market has truly taken off now.

US crude exports reached just shy of 2 million b/d in one late September week of this year, more than three times the amount exported one year earlier. That is also well below export capacity in the US Gulf Coast alone, which Platts Analytics currently estimates at 2.927 million b/d but will grow to more than 4 million b/d in Q2 2018.

Just 10 companies took US crudes in the 12 month prior to the end of the ban. Since then, more than 30 countries have taken crudes. Asia is the main consumer, led by China, but US crudes have found willing buyers in India, throughout Latin America and most recently in Northwest Europe, where they have been seen displacing West African grades.

The types of crude leaving US shores is diverse, too. Western Canadian Select and other heavy sours from Canada typically are in the 21 API, 3.6% sulfur range, and can compete in markets served by Mexican and Venezuelan grades. The US has plenty of medium sours: Mars, Alaska North Slope, Southern Green Canyon, LOOP range from about 29.5 API to 33 API with sulfur content in the 1%-2.25% range. Finally, at the light sweet end of the scale is the well-known WTI (41-42 API, 0.33% sulfur) but ever-increasing availability of Eagle Ford crude and condensate (45-55 API, 0.05%-0.15$ sulfur) and Bakken (42.25 API, 0.12% sulfur).

Looking ahead, Platts Analytics recently forecast total US crude exports will average 2.5 million b/d by 2020 and 3.7 million b/d in 2025. China’s oil trading arm Unipec has already called out the US as a major source of its crude in the 2020s and beyond.

OPEC and non-OPEC countries have offered no clear insight into their plans for production cuts set to end in spring 2018. But it would appear that regardless of the result — the cuts are maintained, the cuts are deepened, the cuts are abandoned—the US remains poised to continue its emergence as a major player on the world oil supply stage.

The floodgates were opened. The game has changed. The possibilities are endless.

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