After falling to below 2.7mn b/d in September, US crude oil exports are poised to rebound to the typical volume of more than 3mn b/d temporarily before potentially falling back to depressed levels by the end of the year.
In this episode of The Crude Report, associate editor Amanda Hilow and vice president Jeff Kralowetz review what changes the market has had since September and discuss the volatility of various market fundamentals that will affect crude flows through the remainder of 2021.
Jeff Kralowetz: Hello, everyone. This is The Crude Report, our podcast series on trends in the global oil market. And today we have Argus Americas Crude Associate Editor, Amanda Hilow here to help us look at why US crude exports crashed in September, why they came back up in October, and what she thinks is going to happen to them from now.
My name is Jeff Kralowetz. I do business development on crude markets from the Houston office, and I will be lobbing the questions at Amanda. And, Amanda, I think before we get started or go any further, as we record this podcast, the rise of gasoline and diesel prices across the country has some people calling for a release of crude from the US Strategic Petroleum Reserve (the SPR) and maybe less likely, but a re-imposition of the ban on US crude exports. So what are you and your fellow Argus reporters hearing about all of this?
Amanda Hilow: Thanks, Jeff. The read from our reporters in Washington is much like you said in that the SPR release is much more likely out of those two options as it can be accomplished by a simple directive from the president compared to renewing the ban on US crude exports which, in most scenarios, would require an act of Congress. And right now, it doesn't appear that there are enough votes to be able to actually pass something like that.
Jeff: Okay. So thanks a lot, Amanda, for that. And as you've been hearing, a lot of folks in the industry are questioning whether an SPR release or even less, a return to crude bans would have much effect on domestic consumer gasoline and diesel prices. So what's the logic behind that conclusion that SPR or a renewed ban won't help at all?
Amanda: That's a really good point, and I think that it is important to discuss because gasoline and diesel prices are set on a global market, so even if US refiners had cheaper stranded crude to process, the prices of gasoline and diesel would continue to reflect the worldwide supply and demand for those products. In the meantime, a ban on US crude exports could certainly reduce the incentive for US crude producers to invest in more drilling. And that would actually have the effect of lowering crude availability in the US and raising money to import instead.
Jeff: Okay, great. So we won't dive into this bit anymore today. But for those of you who are listening, remember that our reporters and analysts are going to be looking at this really many times a day in our news feeds, in our price reports, daily and weekly one, and in our other news services. So I encourage you to follow the whole range of Argus' coverage of this. Meantime, we're going to dig into some more kind of concrete supply and demand fundamentals around US crude exports in the current market and, as I mentioned in the intro, what happened in September.
Amanda: Yes. So we saw quite a substantial drop from August to September with the latest data drop by the US Census Bureau last week reflecting a roughly 13% drop month-on-month to the lowest that we've seen since March 2019. So that's well before the start of the Covid pandemic. Now, what was happening, of course there was the Covid pandemic limiting global crude demand, as well as muted flows to China amid lower government import quotas. But the largest factor in this drop is actually much more easily explained by one factor and that's weather.
Jeff: And when you say weather, you mean Hurricane Ida?
Amanda: Exactly. Hurricane Ida landed on the US Gulf Coast in late August as a Category 4 storm, and it temporarily knocked out more than 96% of offshore oil production. Shell, which is a major producer offshore, reported impactful damages at its Mars, Olympus, and Ursa platforms, and those feed the West Delta-143 facility that goes into the 400,000 b/d Mars pipeline to the Louisiana coast. So we ended up seeing Shell as well as a couple other companies actually declare a force majeure on those Mars deliveries for a time. Additionally, we had seen loading operations suspended until late September at the Louisiana Offshore Oil Port (LOOP) which is known for loading much of the long haul VLCC cargoes that usually head towards Asia-Pacific.
Jeff: Okay. So then we said that there was a crash in September. It was down around 2.7, 2.8mn b/d for US crude exports, but the weekly EIA reports from the federal government show that crude exports on a weekly basis look like they're over 3mn b/d. And I know those numbers get revised, but what are you seeing for fundamentals that are going to affect the export market volumes?
Amanda: Yes. So we do have LOOP back up and operational – shipping VLCC again. And additionally, we saw Shell bring back the Olympus platform at the start of October. It had originally said that the portion of the station that handles crude from Mars and Ursa would be offline until early 2022, but the company actually recently announced that it would restart operations at its offshore transfer station as soon as this month. So that could allow the Mars pipeline to resume full operations much earlier than originally anticipated. So I'm not surprised to see higher volumes for October and November. But I wouldn't be surprised to see a drop come December because the spread between WTI and Ice Brent now is actually deteriorating the arbitrage (arb) to export US crude.
Jeff: So you might want to explain that one a little bit because people get a bit confused about how to look at the arb. Do you just take WTI Cushing against the prompt Cushing versus the prompt Ice Brent, or what's the market look at to define the arbitrage?
Amanda: For U.S. crude, it's actually much more indicative to look at the spread between prox Nymex and Ice Brent that settles two months forward since that's the contract that's used in the global waterborne market. So for example, we're currently in the December trade month. So December loading cargoes are priced against February Ice Brent. So you look at the spread between those two benchmarks. So far, in this trade month, we've seen that spread remain inside a dollar per barrel with WTI occasionally slipping to a rare premium against February Ice Brent.
Jeff: Okay. So WTI at a premium to the Ice Brent probably not going to encourage a lot of exports. But what would the spread have to be to really be encouraging to more exports of crude?
Amanda: Generally speaking, to incentivize more US crude exports, you would want WTI to be at a discount to Brent near $2/bl or wider for that arbitrage to work from the US Gulf coast for cargoes going to Europe. But for longer haul shipments to Asia Pacific, that spread actually needs to be closer to $4/bl or so because timing differences, as well as a higher loading cost to reverse lighter onto a VLCC.
Jeff: Okay. And for people who don't watch the market every day, why is WTI so expensive versus Brent right now?
Amanda: The main thing is that Cushing inventories have been trending lower consistently, and they're currently at a three-year low. And this is largely because of ongoing linefill operations at the Capline reversal project, which is diverting some crude flows out of the US Midcontinent away from the Cushing storage hub.
Jeff: Okay, and just a refresher, Capline was a 1.2mn b/d line that went north from St. James, Louisiana, to Patoka, near Chicago. Now, it's been reversed and it's a pretty big theme to market these days. Do you think that is going to have a big effect on exports?
Amanda: Yes. I think it's really important now. It won't be nearly that volume on the capacity that was going northbound. On the Patoka to St. James pipeline, we expect it to begin shipping at around 100,000 b/d early next year. Most of that volume is expected to be crude from western Canada so you can expect largely heavy sour grade, and those would really complement the complex refinery configuration that we know Louisiana has. So it's very likely that it could displace some of the US medium sours produced offshore – Mars, for example. And if that were to happen, it's quite likely that we would see this Capline reversal project resulting in some higher export volumes out of Louisiana.
Jeff: So shifting a bit, I think a lot of people have been reading about the high price of nat gas in Europe and the tight market there. What effects is that going to have on US crude exports?
Amanda: So I think that it will raise demand. I have already been seeing it raise demand despite the poor arbitrage condition. Soaring natural gas prices have been making hydrotreating uneconomic. So that's been raising demand in Europe for more sweet grades that are known to produce light ends that could be run as an alternative to gas. So we're seeing more demand for our grades like WTI and West Texas Light. And despite a difficult-to-work arbitrage on paper, we actually saw the FOB price of WTI hit a record high against Ice Brent as recent as late October.
Jeff: Okay. That sounds a little bit chicken in the egg, you know, WTI fob is high, but how does it keep getting higher when the arbs are already...explain what's happening there.
Amanda: Exactly. So what this is signaling to me was the fact that WTI fob Houston is that those are premium to Ice Brent and a premium to domestic prices. For example, if you look at WTI Houston pipeline versus the waterborne market, it's around 20 to 30 cents higher. Ultimately, what this reflects is that there's more domestic demand to fill the gap in inventories at Cushing, so prices are being bid up in the domestic market in order to keep more volume regional.
Jeff: Okay. Thanks a lot. And I'm just looking at the clock here. I think we're out of time for this podcast. We'll do more on it later, but thanks for keeping such a close eye on US exports.
And for those of you listening, if you want to see our daily coverage of US crude markets including the pricing and analysis and news, we would hope that you consider subscribing to the Argus Americas Crude report, which is a daily report, as well as lots of other services that we have. You can see all about those at our website at www.argusmedia.com. Meantime, thanks for tuning in. We hope you'll join us again next week for our next episode in The Crude Report.