Analysis: US crude exports a niche market for now

OREANDA-NEWS. June 09, 2016. US crude exports will likely remain a niche market in coming years because of narrow price spreads and a lack of US infrastructure.

The narrowing differential between US benchmark WTI and Ice Brent has provided little incentive to export crude in large quantities since the US in December lifted a 40-year ban on most crude exports, said BB&T Capital Markets analyst Kevin Sterling, at the Argus North American Crude Transportation Summit.

Brent began pricing far above WTI amid the US shale production boom. In 2011-2012, Brent was consistently \\$20/bl above WTI, and the spread peaked above \\$29/bl. The premium incentivized US producers to push for lifting of export restrictions. But the differential has narrowed materially to below \\$1/bl amid a global crude glut, neutralizing most arbitrage opportunities.

Brent needs to trade at a premium of at least \\$3-\\$5/bl to WTI to make exports economic, analysts said.

Ice Brent August futures today settled at \\$52.51/bl, a premium of 67?/bl to WTI August.

There is long-term potential for large-scale domestic exports as production should increase later this decade in the Eagle Ford and the Permian.

Until then, the US is "going to be a niche player," providing swing crude in times of global market disruptions, said chief executive of Peaker Energy Group Matthew Goitia.

The US Energy Information Administration (EIA) is forecasting near parity in the two benchmarks in its 2016-2017 forecasts. The relative parity is based on the assumption of competition between the two crudes in the US Gulf coast refinery market, as transportation differentials are similar to move the crudes from their respective pricing points to that market, the agency said.

Significant US crude exports will not be needed until domestic production reaches 10.5mn b/d, said executive vice president at Turner Mason & Company John Auers. This is in part because of recent investments in refinery infrastructure.

That could take years. US crude production should fall from an average of 9.4mn b/d in 2015 to 8.6 million b/d in 2016 and to 8.2mn b/d in 2017, the EIA said yesterday in its Short Term Energy Outlook.

As such, large sustainable export volumes are not likely until the 2020s, Auers said.

Ponderosa Advisors expects 2.7mn b/d of US exports by 2020, the majority from the Gulf Coast region. The exports will be light crude of 42°API or higher, said managing director Bernadette Johnson.

Even if crude prices recover to higher levels a lack of US export infrastructure will also hamper exports, analysts said. With few exceptions, US ports cannot load large Suezmax or VLCC vessels, which are the norm for most long distance crude trade.

Lifting the crude export ban has closely tied the US Gulf coast market to the international market, causing more competition.

"Domestic producers are competing everywhere on price, including in their home market," said ClipperData chief executive Abudi Zein.

This has resulted in domestic crude losing US market share to imports, he said.

The increasing imported barrels are causing logistics problems, with longer waiting times for ships to deliver crude to US refineries. The average amount of crude waiting to be offloaded is about 12mn bl. This year, that number peaked as high as 36mn bl and is now at around 20mn bl, Zein said.

There have been ships waiting in the Gulf coast with Iraqi crude for as long as six weeks, he said.

US crude imports averaged more than 7.6mn b/d in the previous four weeks, or 9.5pc higher than the same period last year, the EIA said today.