The Fuse

No Tidal Wave of U.S. Crude Exports, But ‘Opportunistic’ Deals Taking Place

by Matt Piotrowski | June 08, 2016

Since the 40-year ban on crude exports was lifted six months ago, the U.S. has not seen a flood of cargoes sent outside its borders. Nor is one expected, given shrinking domestic output and tight spreads between U.S crudes and international benchmark Brent. While the end of the ban was certainly a long-term win for the industry, export deals so far have been “opportunistic” and isolated in nature and have gone to a wide variety of buyers. Cargoes will continue to trickle out, but a gusher won’t happen unless domestic production rebounds significantly.

Export deals so far have been “opportunistic” and isolated in nature and have gone to a wide variety of buyers. Cargoes will continue to trickle out, but a gusher won’t happen unless domestic production rebounds significantly.

For the first quarter of this year, in the immediate aftermath of the ban being lifted, U.S. crude exports averaged .42 mbd, down from .45 mbd during the same period last year, according to data from the Energy Information Administration (EIA). Exports fell year-on-year as a result of tighter price spreads and lower U.S. production. At the same time, however, March data shows the strongest month since last May with exports pegged at .51 mbd. Even before exports were liberalized, producers could ship volumes outside U.S. borders as a result of loopholes, with most cargoes going to Canada. The latest data shows that a majority of exports went to countries besides Canada, the first time since 2000.

USexports

In March, the U.S. shipped just under .25 mbd to Canada, while the rest went to Curacao, Israel, Italy, Japan, the Marshall Islands, the Netherlands, and Nicaragua. With the spread between WTI and Brent having tightened since March, exports may decline again. In fact, for the past four weeks, the EIA pegs exports, in its preliminary data, at .42 mbd, down 18 percent versus March and 8.6 percent lower year-on-year.

Marchexports

With the current state of the U.S. oil market, exports will occur on an “opportunistic basis,” EIA Administrator Adam Sieminski said last month. While economics do not favor sending large volumes overseas, players can take advantage of certain arbitrage opportunities when favorable circumstances occur. For instance, independent traders have bought crude from the U.S. to store, taking advantage of the wide contango—which has recently narrowed. One example is commodity merchant Gunvor buying a cargo from the U.S. to store at its facilities in Panama.

Flows to Latin American and Caribbean countries will likely continue as refiners in the region can blend lighter grades from the U.S. crude with heavier crude.

Meanwhile, flows to Latin American and Caribbean countries will likely continue as refiners in the region can blend lighter grades from the U.S. crude with heavier crude. In Curacao, an island in the southern Caribbean which imported 75,000 bd in March, the second highest level after Canada, a PDVSA refinery is located there. The plant is taking in U.S. crude to blend with Venezuelan heavy crude in order to optimize yields. This trend should continue, as Venezuelan Oil Minister Eulogio del Pino pointed out last week to reporters at the OPEC meeting. It is ironic that Venezuela, which sends roughly .8 mbd to the U.S., is now importing from its political foe at a time the country is dealing with a major economic crisis and is on the verge of default.

Imports on the rise, for now

Even though the trade barrier was recently lifted, the big news in trade flows regarding the U.S. is the big uptick in crude imports as a result of strong demand from both refiners and consumers and the continuous fall in domestic production.

Even though the trade barrier was recently lifted, the major news in trade flows regarding the U.S. is the big uptick in crude imports as a result of strong demand from both refiners and consumers and the continuous fall in domestic production. U.S. crude output is down by almost 1 mbd from its peak last year, while refinery runs are close to 16.3 mbd, flat versus this time in 2015. Against this backdrop, crude imports are now averaging around 7.6 mbd, a sharp .6 mbd uptick from this time a year ago. The biggest beneficiaries of higher U.S. imports have been Iraq, Colombia, Saudi Arabia, Nigeria, and Angola. The sharpest turnaround has occurred for Nigeria, which was virtually shut out of the U.S. market with the rise of shale. But in May, based on preliminary data, Nigeria sent some .24 mbd to the U.S., a 420 percent annual rise.

In order for imports to reverse their current upward trend and exports to occur in larger volumes, U.S. crude output needs to rebound sharply and price differentials need to widen again. When U.S. supply rises, not all domestically produced crude will be consumed by U.S. plants. Overall, the crude slate of U.S. refineries is heavier than shale oil. With shale expected to rise by 2.7 mbd from 2017 to 2040, according to EIA projections, exports will pick up over the longer term. Just don’t expect a tidal wave anytime soon.

 

 

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