The Fuse

Despite High Imports, U.S. Crude Exporters Gain Market Share in China Amid OPEC Cut

by Matt Piotrowski | February 22, 2017

U.S. crude oil exports have received a lot of hype over the past year or so. Ever since President Obama signed legislation in December 2015 to allow a liberalization of exports, volumes leaving U.S. shores have received extra attention to see how they’d shake up global oil markets. But for all the excitement, the amount U.S. crude producers exported increased by only a modest amount in 2016 versus the previous year. What gets overlooked sometimes is that the U.S. is still importing some 7-9 million barrels per day (mbd) of crude. With that in mind, it’s unlikely that exports will remain significantly high for an extended period of time.

For all the excitement, the amount U.S. crude producers exported increased by only a modest amount in 2016 versus the previous year.

There has, though, been a surge of exports recently with volumes reaching 1 mbd for the week ending February 10, based on preliminary EIA estimates. This jump might be just a blip as no clear trends have yet emerged with crude exports. In 2016, the U.S. exported some 530,000 barrels per day (b/d), up only 65,000 b/d from 2015, with a majority still heading to Canada, a large buyer even before the ban was lifted. Beyond Canada, exports have gone to a varied group of buyers, in Latin America, Europe, and even Asia, fluctuating sharply month to month.

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Reuters reported that traders have been sending heavy crude from the U.S. to Asia, particularly small refiners in China as OPEC has dialed back there. Some 2 million barrels of U.S. heavy crude will arrive in China in April, which comes on the heels of 600,000 barrels in January. For November, the last month for which the EIA has final data, the U.S. shipped some 76,000 barrels per day (b/d) to China, second to Canada. Volumes to China have risen as a result of market gaps from the OPEC cut, traders told Reuters, as most producers in the cartel—except for Nigeria and Angola—produce medium to heavy crudes. The higher price for Middle East heavy crudes to Asia has made it economic to ship there from the U.S.

Traders have been sending heavy crude from the U.S. to Asia, particularly small refiners in China as OPEC has dialed back there.

It’s ironic that U.S. exports of heavy crude have risen considerably given that the economic and logistical justifications of lifting the ban stemmed from a glut of light crude that resulted from the sharp rise in shale oil. For the most part, before the tankers of heavy volume headed to China, it was mostly light crude shipped to foreign customers. While growth in exports has been modest, it has stabilized crude price differentials. In the U.S., spreads between light, sweet and heavy, sour crudes have returned to normal of around $3-$4, after reaching parity because of the overhang of higher-quality light, sweet grades. At the same time, the differential between U.S. West Texas Intermediate (WTI) and European marker Brent has steadied around $3.

Curb your enthusiasm

Even with the recent surge, it’s important to keep enthusiasm over exports in check. While the end of the ban was certainly a long-term victory for free market principles and the oil industry, export deals so far have been mostly “opportunistic” because of logistical gaps. Market participants in the U.S. will continue to look for these openings overseas when economics are favorable. But the U.S. is still far away from materially impacting the global oil market through exports in a significant way. Refiners rely on foreign supplies for roughly 45 percent of their needs.

“The important thing to remember about exports is that every time we export a barrel, because we have more demand than we have supply, we have to import a barrel to replace it. That’s the way it’s always going to work.”

As Rusty Braziel of RBN Energy said last week at the Center for Strategic and International Studies: “The important thing to remember about exports is that every time we export a barrel, because we have more demand than we have supply, we have to import a barrel to replace it. That’s the way it’s always going to work.”

Perhaps the biggest impact of exports has been on U.S. refiners because of the changes in price spreads. Moreover, since the shale boom took off, refiners have tweaked their plants to take in more tight oil. To the extent that they continue to do this, domestically produced light crude will be mostly run by U.S. refiners rather than shipped to customers overseas. For the heavier grades, how much the U.S. exports depends on OPEC, which may end up cheating on production targets to keep market share.

A recent Bloomberg article noted how the U.S. could soon be exporting more than what four OPEC countries produce. That may sound like a larger deal than it is. The U.S. is still a major market for OPEC, with the cartel selling more than 3 mbd to American refiners, and the country’s export volumes pale in comparison to heavyweight producers in the group, such as Saudi Arabia, Iraq, Iran, and Kuwait. OPEC was able to increase its market share in the U.S., up to 40 percent of total imports versus 33 percent early last year, as shale got hit from the extended period of low prices.

Obviously, it’s good news that U.S. producers are able to muscle into new markets to sell their crude, but it’s important to keep the broader picture in perspective: The U.S. is still highly reliant on foreign imports.

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