A market view of US crude exports

Author Argus

Although the volume of US crude exports is falling, there is still international demand for US crude, most notably in Europe, which has overtaken Asia as the largest regional buyer.

Jeff Kralowetz, VP, crude and NGLs, connects with Amanda Hilow, senior reporter, to discuss how trade patterns for exports leaving the US Gulf coast continue to evolve. They cover Corpus overtaking Houston as the top export location, waterborne prices diverging from pipelines, and increasing volumes of crude headed to storage in the Caribbean before reaching destinations around the world.

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Jeff: Hello, everybody. And welcome to the latest in our series of podcasts on trends in the global crude markets. Today, we're joined by our Houston-based U.S. crude waterborne reporter Amanda Hilow, and she's gonna discuss what's happening with what was until very recently, a very rapidly growing U.S. crude export market. So, welcome, Amanda.

Amanda: Thanks, Jeff.

Jeff: And I think the first question has to be about Covid[-19] and the reduced demand for crude around the world. How is all that affecting U.S. crude exports?

Amanda: So, we're definitely starting to see total export volume fall, although there is some disagreement on exactly how quickly it is. If you look at data from analytic firms, like Vortexa and their competitors, indications are between 2.3 and 2.9mn b/d. But at the same time, EIA data is showing a lot stickier of a number for outbound exports with April and May hovering around a 3.5mn b/d average.

Jeff: Okay. Well, thanks a lot. Now, whether Vortexa and their consultants are right or EIA is right, whatever the real number, where do we see the demand for crude exports going forward?

Amanda: Well, going forward, we expect to see some shift towards Asia-Pacific as storage hubs like Singapore and China start to fill up with cheap price crude as the Britain by spread narrows. So, this is opening up the arbitrage again for U.S. grades like Bakken and WTI.

But in the first quarter of this year when Covid-19 had first began running rampant across global markets, but before we saw any major declines in physical crude flows, we actually saw Europe take over enough market share from Asia to become the top destination for U.S. crude as a whole. And this was particularly elevated in the Netherlands, which became the top buyer of U.S. crude behind Canada in March.

And I really just... I want to plug this in right now because it reflects how Rotterdam is burgeoning as a market for U.S. grades like Bakken and WTI, which are now competing on a delivered basis with West African crude and with more traditional North Sea grades.

And it's highlighting how WTI is ultimately building its prominence as a global crude benchmark while stakeholders across the globe turn away from the more traditional BFOE grades in the Dated Brent benchmark. And one of our colleagues in London actually wrote a great blog post about this recently. I think it would be a great idea for our listeners to check out as they have time.

Jeff: Okay. Super. Now, so you've told us a little bit about where this stuff is going, where the U.S. exports are going, but one of the places it seems to be going is to storage in the Caribbean. And I think that's an area a lot of us don't know much about, what storage exists in the Caribbean and what's happening there.

Amanda: Yes. So, we've been seeing a renewed flurry of tankers heading from the U.S. Gulf coast to the Caribbean with the main outlets being Saint Lucia, St. Eustatius, and the U.S. Virgin Islands, where there's a 34mn barrel operational storage terminal. We expect this trend to continue in the near-term as Curacao is preparing to tender another 25mn barrels of crude storage capacity at Bullen Bay, as PdVsa's lease on the La Isla refinery expired last December.

And Aruba may also list another 10 tanks, totaling 6.4mn barrels of crude storage. And then they're working to repair another seven tanks after that that could add 4.2mn barrels. So, there's really just an endless supply of storage capacity that U.S. crude could be heading for the near-term. One interesting question that I've gotten recently is whether this crude can be re-imported to the United States and what regulations it has to abide by.

And I just want to note that, particularly for the Virgin Islands, there is no extra cost around freight to re-import this. If that's what market participants choose to do, they don't have to use Jones Act tankers. So, they can use cheaper foreign-flag vessels. That remains an option. At the same time, this could be an intermediary stop for destinations in Asia.

One of the main charters from the U.S. Gulf coast to the Caribbean has been Unipec. So, we expect that they're buying U.S. crude on the cheap during the current low price environment with expectations that they'll load for Asia at a later date. Limetree Bay off of the U.S. Virgin Islands is actually another point for a single point mooring system that's capable of loading and unloading VLCCs. So, they could be sending it to the Virgin Islands with expectations that they'll load onto a VLCC and send to China later.

Jeff: Okay. Well, thanks a lot. That's a lot of really good detail that I certainly didn't have. Related to that, Caribbean storage, there's also floating storage. A lot of crude is going onto VLCCs to just wait for the market to get stronger. Do you have a feel for how much is going on to floating storage and how long it's likely to remain in floating storage?

Amanda: Absolutely. That's another growing trend that we've been seeing. We know that at least 240,000 b/d of exports in April were destined for a floating storage. And I'm counting so far another 260,000 b/d in May.

Based on the average time charter agreement, we expect that this crude will continue floating at least until the fourth quarter with the majority of the time charter agreements hovering between three to nine months. And then we're also seeing at least two tankers time chartered for a period of up to one year. So, ultimately, players have the option to wait until the price is right before they have to offload these cargoes.

Jeff: So, now let's talk about the horse race in the Gulf coast among the ports that are putting this crude out on the water. A lot of people know that Corpus [Christi] passed Houston as the number one exporting area about September of last year. Do you think that Corpus is going to stay number one or is there a scenario where Houston reclaims that position?

Amanda: That is a really great question. And I think it's important to note why Corpus is now the top exporter of U.S. crude before we can answer that. Corpus is now accounting for nearly half of the total exports. And this has been propelled by the recent pipeline projects out of the Permian Basin, including Epic, Cactus II, and Gray Oak pipelines.

That brought more than 2mn b/d of pipeline capacity from the Permian Basin to the Corpus area, whereas refining capacity in the region is only around 1mn bl and existing storage capacity is only 20 to 30mn bl.

So, all of that additional volume that's been committed on those new pipelines has to go out. At the same time, Houston has the ability to store up to 100mn barrels of crude, not including storage specific to refining. It's also home to around 20pc of the United States' total refining capacity.

So, the equilibrium in Houston isn't nearly as dependent on exports as it is in the Corpus area. And Houston does have the loading capacity for it to become the top exporter again, but we expect Corpus to dominate at least for the next year. And I'll tell you the reason why.

There are two main pipelines on track still to come online in 2021. This includes the Wink-to-Webster pipeline project and another expansion on Enterprise's Permian-to-Echo system. So, those two together will add another two million barrels per day of inbound capacity to the Houston area by 2021.

And ultimately, it's gonna depend on what the total commitments on these pipelines are as well as regional fundamentals like refining demand and storage capacity to see if that additional volume gets dedicated to exports, or if we end up consuming it domestically instead.

Jeff: Okay. And just on a related point, I have to ask about the LOOP. That's the Louisiana Offshore Oil Port. A lot of people know that that's the only facility in the Gulf coast right now that can fully load a VLCC. So, that being the case, why is the LOOP so far down the list of export locations in the Gulf coast?

Amanda: Another great question. I think it's really important for our listeners to remember that LOOP was originally built as an import hub. It's the primary destination point for mid-East grades, like from Saudi and from Kuwait. And that port only has one bi-directional pipeline that is responsible for both import and export operations.

So, in order to load a VLCC for export, LOOP has to completely haul import to do so. At the same time, LOOP exports are primarily made up of medium sour grades like Mars and Poseidon for which we already have a built-in demand center in Louisiana. So, it won't be until periods of lower demand like turnaround season that we'll actually start to see export interest rising out of LOOP.

And while all these obstacles remain for LOOP exports, market participants are still considering Moda's Ingleside terminal near the Corpus area is the most operationally efficient port for long haul cargoes as it can load 1.2mn barrels onto a VLCC pretty quickly, and it can load the remaining volume just through one ship-to-ship transfer.

Jeff: Perfect. Thank you very much. Last question. I think we ought to talk about pricing, and how are these export barrels priced at the Gulf coast? A lot of people will know that Argus has a WTI FOB on the water price assessment. We've had it for about two years now, but a lot of people may not understand what it represents. Is it just a loading cost plus the MEH price, or how does that work?

Amanda: That is my favorite question. Thank you for asking it. It's actually a common misconception in the market that the FOB price represents MEH plus loading cost. This is absolutely not the case. WTI FOB Houston is an assessment based on real deals, real bids, real offers, and we price it against not just WTI Houston but Ice Brent and CMA Nymex WTI as well.

It's important to remember that WTI FOB Houston reflects the meeting point of the domestic U.S. market and international markets as a whole, where demand for U.S. grades has been burgeoning since, I want to say, mid-2017. We'll see the FOB spread to the pipeline index fluctuate, depending on what domestic and global demand looks like.

Fob prices slide below pipeline market

Just recently during the May trade month, we saw FOB fall to a roughly $1/b discount to MEH on this drastic decline and demand caused by Covid-19. We saw a similar case in September 2019 when the U.S. and China were going through a trade war and Chinese buyers like Unipec had to back out of all their previously purchased U.S. volumes on expectations of additional tariffs.

So, ultimately, this spread is going to fluctuate depending on what the market looks like. And it's a great point for global shippers, global refiners, global producers just to look at as a mark-to-market index. And it will ultimately fluctuate depending on what price has to be made in order to spark a deal for these cargoes.

Jeff: Okay. Super helpful. Thank you very much to Amanda and thanks to all of you guys for joining us. We will be back soon with another one of these podcasts on trends shaping the world crude markets. Until then, thank you again for joining us.

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