The US Crude Export Chronicles: December 2021

Author Amanda Hilow, Deputy Editor

Crude prices have regained some of last month’s losses, but growth is limited near-term amid surging cases of the Covid-19 Omicron variant and a looming global crude surplus in 2022.

Welcome back to Argus’ monthly blog: The US Crude Export Chronicles, by deputy editor Amanda Hilow (@HilowMidpoint). Come back every month for a recap on US crude exports and how they are faring in an uneven recovery from the earlier stages of the Covid-19 pandemic.

Hot topics

Surging cases of the Covid-19 Omicron variant are keeping a lid on global benchmark prices as existing and anticipated lockdown measures and travel restrictions intended to stanch the spread of the virus continue to weigh on demand.

January Nymex WTI averaged $70.86/bl before expiring as the prompt contract on 20 December, falling by more than 13pc compared to December WTI’s average $81.71/bl.

Additionally, spot prices have been falling on expectations of the US government loaning out up to 32mn bl of crude from the strategic petroleum reserves (SPR) in the first four months of 2022 and selling another 18mn bl in February and March.

Nymex WTI crude futures

Census surprises

US crude exports rose by 8.6pc in October to 2.9mn b/d as offshore production recovered from Hurricane Ida, according to the latest trade data published this month by the US Census Bureau.

Volumes had fallen by 13pc month on month in September following Ida’s landfall, which had resulted in shut-in Mars production and a temporary halt to loading operations at the Louisiana Offshore Oil Port (LOOP).

LOOP, about 20 miles (32km) off the coast from Grand Isle, Louisiana, is the only US port capable of fully loading very large crude carriers (VLCCs). LOOP can export WTI and similar grades but is primarily known as the main export hub for offshore-produced Mars.

LOOP resumed VLCC loadings in late September, helping boost total outbound flows.

The month-on-month increase was also supported by rising demand for US crude in Europe, where an energy shortage substantially increased refining margins and supported arbitrage economics.

In the pipeline

The Capline pipeline started interim service from Patoka, Illinois, to St James, Louisiana, on 18 December and is positioned to begin full operations as of 1 January at an initial 102,000 b/d of western Canadian crude.

With Enbridge's 760,000 b/d Line 3 replacement project from Alberta to Wisconsin, additional volumes have been able to make their way to the US Gulf coast as part of its 370,000 b/d capacity expansion which went into service 1 October. This helped to push the Western Canadian Select (WCS) Houston's discount to WTI Houston to its widest in over five years at about $9.50/bl for the December 2021 trade month.

As a result, heavy sour Western Canadian Select (WCS) prices at the Texas Gulf coast have narrowed sharply against light sweet WTI Houston prices as Capline raises demand for the heavier crude.

What’s next

Capline flows and SPR releases could boost US crude exports briefly during the first quarter of 2022, but producers may find a difficult time competing in an over-saturated global market later in the year.

Americas crude production is poised to rise by 1.8mn b/d in 2022 and, combined with Opec+ production hikes, global supply should rise by a combined 6.4mn b/d, according to Paris-based energy watchdog IEA.

Oil consumption is expected to trail the increase in supply, rising by 3.3mn b/d next year to 99.5mn b/d, according to the IEA. That puts consumption at around 2.5mn b/d less than forecast global supply in the second quarter of 2022. And one scenario by Opec’s economic and technical think tank, the Economic Commission Board, suggests the surplus could rise to 3.7mn b/d as soon as February as result of various SPR releases.

US spot crude differentials to global benchmarks would likely need to ease to more competitive levels for the arbitrage economics to remain workable after an SPR release. Prices could stabilize once that initial surplus is cleared, but growing Opec+ production could displace US crude further from the Asia-Pacific market, in particular.

Come back again next month for Argus’ take on how US crude exports are faring in an oversupplied global market while Covid-19 remains in full swing. Until then, smooth sailing through the holiday season.

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