U.S. crude oil exports declined noticeably during the second part of last year—an ironic development given the intense lobbying at the same time for the liberalizing of the country’s export laws and the ultimate repeal of the ban in December. Until December, the only shipments were mainly through loopholes which allowed flows to Canada.
Why the decline in U.S. crude exports? Like most of the oil market, the Atlantic Basin is saturated with oversupply and high inventories.
Why the decline in exports? Like most of the oil market, the Atlantic Basin is saturated with oversupply and high inventories. Meanwhile, West African and Middle East producers are competing fiercely to sell in Asia, limiting opportunities for U.S. producers to penetrate that market. Against this backdrop, the economics aren’t favorable for exports, with the spreads between U.S. crudes and international light, sweet prices having tightened.
The main factor behind the push to repeal the ban, which started early this decade when shale output took off, was U.S. light crudes selling well below Brent. This is no longer the case. Most headlines tend to focus on the spread between European marker Brent and NYMEX West Texas Intermediate (WTI), whose hub is at land-locked Cushing, Oklahoma. But Light Louisiana Sweet (LLS), produced on the Gulf Coast, is a better indicator of the U.S. market since it is waterborne, and lately it has been trading above or at parity with Brent. That’s a sharp reversal from a year ago. At the end of the first quarter of 2015, LLS sold for more than $5 under Brent, opening the arbitrage for exports. While the ban on shipping volumes outside the U.S. was still in place then, producers were able to export a minimal amount because of loopholes, mostly to Canada. In April, exports reached their record of .586 mbd, up .3 mbd from the same month in 2014, and .45 mbd versus April 2013 (see graphic below).
The LLS-Brent spread has fluctuated over the past year, and for a good part of January, LLS was roughly $1 above Brent. Now the two are at parity, undermining export opportunities.
The LLS-Brent spread has fluctuated over the past year, and for a good part of January, LLS was roughly $1 above Brent. Now the two are at parity, undermining exports. In the latest revised data from the Energy Information Administration (EIA), exports averaged .392 mbd in December, a 7 percent year-on-year drop, and a decline by a third from the April peak (see graphic below). Moreover, EIA preliminary data shows that exports in February were .396 mbd, down 19 percent year-on-year. Besides overall market conditions having hurt U.S. opportunities in Canada, improved pipeline dynamics with the reversal of Enbridge’s Line 9 in Quebec have lessened the need for U.S. crude. This gives Canadian refineries on the East Coast access to more crude produced in the Western part of the country.
While economics and the global market are in general unfavorable for exports, some cargoes will still be shipped to foreign buyers. Refineries in Europe and Israel have already bought volumes of U.S. crude since the ban was lifted in December. Nimble traders, depending on crude grades and volatility in spreads, can capture arbitrage opportunities to sell volumes into the international market. Moreover, some refiners overseas are purchasing U.S. light crudes for testing purposes, even at a loss, to see if U.S. grades can run in their systems. These tests are to help refiners boost supply diversity and ultimately energy security so they don’t have to rely on a limited number of sellers, some of whom might be unreliable because of political unrest or other factors.
U.S. imports are back on the rise
Imports are rising, which should keep LLS near Brent. There’s no need for a wave of exports because there’s enough appetite domestically for crude produced in the U.S.
LLS isn’t important to watch only because of export economics. The price matters for imports, too, since it typically competes directly with Brent and international crudes priced off the European marker. In order for the U.S. to bring in the marginal barrel, LLS has to be strong enough to cover freight costs for imports. Right now, imports are rising, at a relatively rapid rate, which should keep LLS near Brent. There’s no need for a wave of exports because there’s enough appetite domestically for crude produced in the U.S. Here is some recent data that show the uptick in crude oil imports, which is occurring due to domestic crude production grinding lower.
- For the week ending February 24, U.S. crude imports averaged 8.3 mbd, an enormous .92 mbd annual increase.
- The latest four-week average puts imports at 7.8 mbd, a roughly .5 mbd year-on-year jump.
- In December, the latest month with revised data, imports were 7.9 mbd, the highest monthly average since September 2013.
- For 2015, crude imports averaged 7.34 mbd, mostly flat with the previous year, halting four consecutive years of declines.
Spread volatility to persist
Just as the overall oil market will remain volatile, so will spreads between U.S. crudes and international prices. This volatility will naturally affect both U.S. exports and imports of crude. How well U.S. domestic production, which is steadily declining, performs will of course be the biggest factor impacting differentials and how much the country can export, and how much it needs to import. Energy security gains are eroding. We’re now in a much different environment than at the time the push to repeal the export ban took shape.