The US Crude Export Chronicles: April 2022

Author Amanda Hilow, Deputy Editor

Heightened geopolitical tensions and an onslaught of supply from the strategic reserves contributed to a convoluted US crude market last month, with sweet and sour price trends producing two sharply different narratives.

Welcome back to Argus’ monthly blog: The US Crude Export Chronicles, by deputy crude editor Amanda Hilow (@HilowMidpoint). Come back every month for a recap on US crude exports and how they are faring under volatile global conditions.

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What began with a global effort to cool down energy prices with the largest-ever co-ordinated release from strategic reserves in the face of an expected shortage from Russia quickly evolved into a rapidly deteriorating arbitrage to export US crude, which had initially benefitted from European demand for alternatives to Russian supply amid the conflict in Ukraine.

US crude exports rose by more than 13pc on the month to an average of roughly 3.45mn b/d in April, according to preliminary data by the US Energy Information Administration (EIA). But the opportunity to boost outbound flows was short-lived amid surging transportation costs, closed-door deals buoying Russian supply in the market and, simultaneously, the additional release of more than 1mn b/d of crude into the regional market by the US Department of Energy (DOE).

The free-on-board (fob) price for light sweet West Texas Intermediate (WTI) crude loading at the US Gulf coast plummeted over the course of the May US trade month, which ran from 28 March to 25 April. WTI fob Houston fell by $4.26/bl against the international benchmark Ice Brent over the course of the month, touching a roughly two-year low by 19 April at a $2.95/bl discount. The grade averaged a $1.19/bl discount to Ice Brent for May loading, down sharply from an average $3.03/bl premium during the April trade month, when higher European demand had initially pushed WTI fob Houston to an all-time high at a nearly $5.20/bl premium to Ice Brent.

What changed? First, dirty tanker rates to Europe climbed on the back of the surge in demand to hit nearly $5.90/bl by 6 April, already forcing sellers to back down on their prices. Next, the DOE completed its second emergency drawdown in a row that would release 30mn bl of crude from the US Strategic Petroleum Reserve (SPR) beginning in May.

Unsurprisingly, more than 90pc of the released crude sold at a discount to regional benchmark prices, highlighting concerns that the White House’s plan to release an additional 1mn b/d over the next six months could exacerbate infrastructure bottlenecks at the US Gulf coast and inundate the market with far too much supply.

Infrastructure update

The Louisiana Offshore Oil Port (LOOP) has stepped in to try to address these concerns, offering to designate segregated storage capacity for deliveries of both sweet and sour crude from the SPR, also effective with the start to May, though it remains unclear whether traders will commit to a storage-based program amid steep backwardation in the market.

The onslaught of additional sour crude volume from the SPR was expected to pressure spot prices lower for US medium sour Mars in order for it to compete with discounted SPR deliveries, but the US Gulf bellwether sour dashed those expectations by climbing $3.85/bl over the course of the month to a four-month high in the final week of April at a $1.18/bl premium to Nymex WTI.

Mars was partially supported by a higher global call on sour crude exports from the Americas amid the conflict in Ukraine, but spot values were catapulted even higher in late-month trade as two deepwater platforms feeding into the Mars crude stream were taken off line in late April for maintenance.

Work on the Mars and Ursa platforms in the US Gulf of Mexico will last until early June, though production from the facilities has only been restored since November after damage sustained from Hurricane Ida.

What’s next?

Maintenance is likely to reduce Mars availabilities in the global market despite higher demand, although international refiners are still able to fill that gap with like-quality cargoes from Latin America and the SPR.

Of the latest drawdown sale, 7.5mn bl of sour crude will be delivered onto vessels, representing 25pc of the total SPR sales volume. More than two-thirds of that volume comprised Bryan Mound Sour, which has occasionally been exported in recent years.

At least one cargo of Bryan Mound Sour has already loaded in Freeport, Texas, for late-May delivery to Italy, according to preliminary tracking data from Vortexa.

The DOE plans to issue a third notice of sale on 24 May for an additional 40mn bl of crude, with deliveries starting in June, and could see a larger portion of sales heading directly into the export market as EU energy ministers consider phasing out Russian oil imports entirely.

There is still much work to be done before officials make any formal steps to enacting an embargo of any scale, but, as always, Argus is watching how markets will play out amid international strife and ongoing recovery from the worst of the Covid-19 pandemic. Come back again next month for an update on the role of US crude exports in volatile global markets. Until then, it’s (less than) smooth sailing.

Argus is watching, as always, how markets will play out amid heightened geopolitical tensions and a pending recovery from the worst of the Covid-19 pandemic. Come back again next month for an update on the role of US crude exports in volatile global markets. Until then, it’s (less than) smooth sailing.

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