Viewpoint: US Gulf growth weakens Mars to foreign crude

Growing crude output from the US Gulf coast is making coastal benchmark medium sour Mars less expensive than competing international crude grades, and export arbitrage opportunities are expected to continue in 2019.

Indicative of Mars crude export arbitrage strength, the Mars cost and freight (cfr) to China is at a discount to competing foreign grades after estimated delivery costs to the Asia Pacific for December. Mars cfr China averages $1.45/bl less than Basrah Light, about $1.10/bl less than Arab medium, and $1.50/bl less than west African crude delivered to Asia, according to Argus price data as of 18 December.

With record oil production set to continue in the US Gulf, the trend could persist. US Gulf coast output is projected to grow to 1.95mn b/d in 2019 after already setting records in production with an expected 1.73mn b/d in 2018 and 1.68mn b/d in 2017, according to the US Energy Information Administration (EIA).

New offshore sour crude production will continue to make Mars less expensive in relation to competing international grades. Three large offshore projects that were brought online in 2018 will ramp up toward full production in 2019, including Hess' 80,000 b/d-capacity Stampede project that started in January, Shell's 40,000 b/d of oil equivalent (boe/d) Kaikias project that started in May, and Chevron's 75,000 b/d Big Foot project that started in November.

These projects feed into the Mars stream with options to into Eugene Island, Poseidon, Bonito and Southern Green Canyon sour crude streams. First oil output from the LLOG-operated 30,000 b/d Buckskin development and Shell-operated 175,000 boe/d Appomattox is also expected to expand US Gulf sour crude supply in 2019.

Three VLCCs that departed the Louisiana Offshore Oil Port (LOOP) the week of 10 Decemberare destined for South Korea and India, according to vessel tracking data, and although one vessel was confirmed carrying light, sweet crude, typical crude cargoes loaded at the terminal are medium sour. The US Gulf coast is also anticipated to load at least 6.5mn bl of Mars in December for export purposes, according to preliminary data compiled by Argus.

In Europe, January Mars averages around a $1.70/bl discount to competing Urals after estimated delivery costs.

Demand for medium sour storage at the Gulf coast in forward months increased, as storage is commonly used to hold crude in advance of loading for export purposes. The highest price that cleared in the December LOOP auction was 10¢/bl for physical forward storage agreements in March 2019, versus 8¢/bl in the fourth quarter of 2019 in the prior auction.

Despite the discount to international grades, domestic refiners have been left in need of imported sour crude as Mars leaves the US to satisfy foreign demand. Argus data as of 18 December indicates that February Mars is at about a $1.80/bl discount to Basrah Light, around a $2.35/bl discount to Arab Medium and a $6/bl discount to Baltic Urals, after estimated delivery costs to the US Gulf coast within the same time.

US crude imports over the past four weeks have averaged 7.6mn b/d, up by 1.9pc from the same period last year, according to the EIA. The most recent EIA company-level import data indicate medium-sour crude imports also increased. Padd 3 imports of crude with a gravity of 20-34°API and sulfur content greater than or equal to 1pc amounted to 1.57mn b/d in September 2018, up from 1.27mn b/d in September 2017.

In November, about 714,000 bl of Urals were supplied to Lake Charles, Louisiana, on the Aframax NS Lotus, which departed from Primorsk on 20 October. It was the first import of Russian crude to Louisiana since December 2017, when roughly 310,000 bl were offloaded at Lake Charles, according to US Customs data.