Most ‘competitive' oil in the world befuddles analysts

U.S. oil exports hit record highs last week, doubling over the course of a week as the Gulf Coast clears out product backed up because of Hurricane Harvey. The high level of crude exports won’t last forever, but there appears to be a little more life left in the export boom.

The surge in exports led net import totals to plunge to levels never seen in EIA data dating back to 2001. Over the last few years, weekly net imports tend to fluctuate between 6 and 8 million barrels per day (MB/D). But September was a highly unusual month. Net imports fell to 5.7 MB/D in the week ending on September 8 before recovering a bit mid-month. By Sept. 29, however, net imports plunged to 5.2 MB/D, the lowest weekly total on record.

As mentioned, those low import figures were the direct result of an explosion in crude exports. After the U.S. crude oil export ban was lifted at the end of 2015, exports edged up gradually, before really taking off earlier this year. Over the summer, the U.S. saw weekly exports top 1 MB/D in some of the stronger weeks, but more often than not, hovered just below that threshold in an average week.

Hurricane Harvey upended this dynamic. The refining outages led to a piling up of crude oil – oil drillers mostly kept producing but the massive refining complexes along the Gulf Coast couldn’t process all the crude for about two weeks, with some disruptions still lingering. The pent-up supply was always going to lead to a one-off export spree once the refining outages cleared.

But the pricing differential between Brent and WTI has super-charged exports. The disparity between the two benchmarks pretty much vanished when the U.S. began exporting nearly two years ago, but widened sharply after Harvey, due to the backlog of crude. At over $6 per barrel, refiners around the world would be hard-pressed to find cheaper crude than what is coming from the U.S. right now. Why pay $56 for Brent-priced oil when you can pay about $50 for oil coming from the U.S? Of course, there are transportation costs, but the spread is wide enough to make U.S. oil more competitive right now.

Consequently, U.S. exports spiked in recent weeks to record highs, jumping to just shy of 2 MB/D in the last week of September. That puts U.S. oil exports on par with that of Venezuela, an OPEC member and a country that holds the largest oil reserves in the world. In fact, that U.S. export total exceeds the production levels of about half of OPEC members.

Of course, the U.S. likely won’t be able to export at those levels for very long. “We are close to the peak export level,” John Auers, executive vice president at energy consultant Turner Mason & Co., told Bloomberg. The most recent spike is a “temporary phenomenon” that would dissipate as the major Gulf Coast refiners ramp up to full capacity.

The spike in exports is a function of the WTI-Brent spread. That spread will likely narrow as refiners gobble up U.S. crude and erase the imbalance, but the duration of the spread – now lasting for more than a month – has surprised some analysts.

It could take a bit longer for the benchmarks to converge. At the time of this writing, Tropical Storm Nate is strengthening – likely into a hurricane – and heading for the U.S. Gulf Coast. This storm has already shut in a sizable volume of offshore oil production. About 15 percent, or 254,000 BPD, of U.S. offshore Gulf of Mexico production was shut down ahead of the storm.

But some refineries throttled back on operations as well. Reuters reported on Friday that Shell reduced production at its 225,800-BPD Norco refinery and Phillips 66 was weighing a decision on shutting down its nearly 250,000-BPD Alliance refinery.

The outages will likely be temporary, but the latest storm slightly widened the WTI-Brent spread. Still at about $6 per barrel, the differential likely means that the U.S. crude export bonanza will continue for a few more weeks. Only when those two benchmarks narrow will U.S. crude lose its advantage.

© 2017 USATODAY.COM


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