The Fuse

Despite U.S. Crude Export Surge, Import Dependence Remains High

by Nick Cunningham | May 02, 2018

  • U.S. crude exports average above 2 Mbd as WTI-Brent spread widens.
  • Net crude imports at 6.4 Mbd, with Saudi Arabia, Venezuela, Mexico, and Iraq as major suppliers.
  • VLCC docks at Texas City, providing an opening for higher exports.

U.S. crude oil exports have surged over the past year, aided by rising shale production, retooled export terminals, and continued strong global demand growth. The suddenly dominant U.S. export position offers the appearance of improving energy security, as a nation awash in oil is now supplying a growing number of buyers around the world.

For every barrel that is exported, it needs to be replaced with one that is imported.

Crude exports have climbed significantly, but further gains will be more difficult to achieve. More importantly, higher export levels do little to insulate the U.S. from the whims of the global oil market. As the second largest crude importer in the world, the U.S. will remain vulnerable to price volatility despite higher exports. For every barrel that is exported, it needs to be replaced with one that is imported.

Exports surge

U.S. oil exports hit 2.3 million barrels per day (Mbd) for the week ending on April 20, a record, the extraordinarily high level reached due to a variety of factors. The latest weekly data from the EIA pegs exports slightly lower at 2.15 Mbd.

Exports have averaged 1.9 Mbd over the past four weeks, a 152 percent year-over-year increase.

U.S. shale production continues to increase at a rapid pace. The EIA’s monthly estimates put total U.S. oil production at 10.26 Mbd in February, up a staggering 260,000 barrels per day (b/d) from a month earlier. More recent, though less accurate, weekly estimates put U.S. production at 10.62 Mbd as of April 27, up a massive 1 Mbd since September 2017. The flood of new supply is finding its way to numerous destinations in the international oil market: Buyers are easier to find with OPEC and its non-OPEC partners keeping more than 1.8 Mbd off of the market.

Another reason why exports are rising so quickly is that the discount for WTI relative to Brent has widened over the last few weeks. The differential reached as high as $6 to $8 per barrel for a few months in late 2017, largely stemming from the refinery outages along the Gulf Coast after Hurricane Harvey at the end of last summer. That led to a buildup of crude supplies, which depressed WTI, fueling a temporary export boom. In the third and fourth quarters, U.S. crude exports routinely bounced around between 1 and 2 Mbd, after hovering just below 1 Mbd earlier in the year.

As refineries came back online, and crude inventories in the U.S. drained down from extraordinary heights, WTI prices rose and converged closer to Brent. In early 2018, the WTI-Brent differential briefly dropped below $2 per barrel.

More recently, however, the WTI discount has widened again, to around $7 per barrel, amid increasing shale production combined with pipeline bottlenecks. The price discount makes U.S. crude more competitive around the world. Last year, for instance, China emerged as a major buyer of U.S. oil, and that trend is poised to continue this year. After factoring in transit costs of a few dollars per barrel, the discount is still wide enough to justify the expense of shipping over such long distances. In fact, in February, the U.S. shipped 382,000 b/d to China, second to only Canada, which purchased just 13,000 b/d higher for the month.

Infrastructure upgrades are also playing a role in boosting exports.

Infrastructure upgrades are also playing a role in boosting exports. In late April, a very large crude carrier (VLCC) docked in Texas City for the first time, a sign that large-scale oil exports may begin flowing from another American port. The port still needs to be expanded to handle VLCCs on a regular basis, so large-scale exports are not set to begin just yet. However, a growing number of ports are retooling infrastructure that was originally equipped to handle imports in order for oil to flow in the other direction. In February, the Louisiana Offshore Oil Port (LOOP) started export operations, and VLCC loadings have begun. Corpus Christi is exploring the possibility of receiving VLCCs at its port, which would further expand the capacity to ship more Texas oil abroad.

Exports could bump up against limits

Even though U.S. crude exports have increased rapidly over the past year, there are reasons why further gains could be difficult to achieve. First, the aforementioned pipeline bottlenecks in the Permian could start to slow the movement of oil to the Gulf Coast. “[T]akeaway capacity is likely to become insufficient by mid-year, with a deficit possibly reaching as much as 290,000 barrels a day during the first half of 2019,” the IEA said in March. On the one hand, the bottleneck could depress WTI if oil is trapped within the U.S., which would augment the business case for exports. However, if that oil cannot be shipped to the coast, exporting higher volumes will be difficult.

Draining the U.S. of supply while adding barrels to the global market will likely cause WTI and Brent prices to converge as the discrepancy between the two markets dissipates.

Another limiting factor for higher U.S. exports is that an increase in exports tightens the WTI discount. Draining the U.S. of supply while adding barrels to the global market will likely cause WTI and Brent prices to converge as the discrepancy between the two markets dissipates. In other words, the price differentials will put a ceiling on the volumes of crude leaving U.S. shores, although where that cap is remains to be seen.

Exports not a panacea

An increase in U.S. crude exports is viewed as a victory for policymakers in Washington, DC who have long worried that net import dependence undermines energy security. To be sure, increasing oil exports improves terms of trade and is a benefit to producers. However, the rest of the U.S. economy is still vulnerable to swings in the global market. A spike in oil prices will be acutely felt by consumers, irrespective of export levels. Oil prices averaged more than 20 percent higher in the first quarter compared to a year earlier, and WTI recently hit a three-year high. Consumers will notice the difference at the pump: The national average retail gasoline price at the end of April was $2.76 per gallon, the highest level since 2015, and up from $2.40 from a year ago.

Even with the export boom, the rest of the U.S. economy is still vulnerable to swings in the global market.

And despite the sharp increase in exports, the U.S. is still the world’s second largest crude importer after China. For the week ending on April 20—the same week in which the U.S. broke a new record for crude exports—the U.S. still imported an average of 8.5 Mbd, an indicator that demand-side measures are just as crucial as rising domestic production to improve the country’s energy security

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