Dave Ernsberger, Global Editorial Director Oil, Platts in an exclusive analysis of the United States Congressional deal to lift existing restrictions on US crude exports.
The deal unveiled by US Congressional leaders to lift longstanding restrictions on US crude exports comes as a big surprise to world oil markets, where conventional wisdom has broadly been that the walls built 40 years ago around the US crude oil market were there to stay.
This agreement, tagged on to a massive government-spending bill, is historically important for producers, refiners, distributors and consumers of oil in the US.
It also poses important new questions for the rest of the world, where the US could, intriguingly, be jostling with Iran as the latest member of a cast of oil producers looking to find a home for surplus crude oil in, a world currently awash with oil.
Let’s look at some of the most immediate and important impacts of the deal.
A transformational moment for WTI
Firstly, this is a transformational moment for the WTI crude oil benchmark. WTI is unequivocally back on the world stage as a major force in global crude oil pricing.
As a glance at ten years of history of the Brent/WTI spread shows, WTI was driven into the wilderness by the effective ban on US crude exports, struggling to serve as a reflective price reference for all but US oil refiners with access to US crude oil. WTI reflected the value of US crude well, but US crudes weren’t reflecting what was happening in the rest of the world.
World oil markets surged to more than $5/barrel above WTI at the start of 2011. At the heights of US oversupply, with no export markets available and some key US crude pipelines ready to send crude towards US storage instead of taking it away, WTI in Cushing, Oklahoma could be bought for discounts of $25/barrel or more compared to global crude prices.
Markets adjust to changes in supply and demand quickly. Recently, we have seen the Brent/WTI spread narrow to barely pennies. For some months along the forward curve, WTI has even traded above Brent.
Our analysts at Bentek Energy, a unit of Platts, are revisiting their price forecasts in the wake of these new market developments. And with open-ended exports now suddenly on the table, it seems likely that WTI will now serve as a price benchmark that is plugged right back into the world.
Winners and losers
There are also clear trade flow implications. If you are a US producer of crude oil, you’re likely to feel like a winner out of all of this. Markets beyond US shores will be open to US producers for the first time, easing the pressure to sell at steep discounts to US refiners.
While big producers might have been well placed to weather the storm of lower prices through sheer scale and sophisticated risk management techniques, this is especially important for smaller producers weighing up their next steps.
Hundreds of thousands of US stripper wells, each of which is small but with combined production totalling 1 million b/d of crude, are at risk if oil prices fall to the low 30s per barrel, the US’ National Stripper Well Association said this week.
If you are a US refiner, the news will be less welcome. US crude may be still be discounted to a point because it will always be logistically more compelling to deliver to a US refiner than to put oil on a tanker destined for far flung parts of the planet. But the generous margins enjoyed by US refiners will now likely become something of a memory. East Coast Bakken refining margins have already dipped into the red a few times this year.
Our view is that East Coast refiners are likely to be most hurt by unfettered US crude exports. Crude that is today shipped by rail from the Bakken to the East Coast may now more cheaply be sent by pipe to the US Gulf Coast and exported.
Moreover, shipments of Gulf Coast crude to the East Coast by tanker will still need to be shipped on Jones Act-compliant ships, which may be more expensive than a vessel flying another nation’s flag and therefore heading out of the US.
These may be some of the reasons why Republicans included a provision in the bill that will expand a manufacturer’s tax deduction to cover 75 per cent of an independent refiners’ crude shipping costs.
Our analysts at Bentek reckon that with that provision, it may remain cheaper to ship Bakken crude to the East Coast by rail than by pipe to the Gulf Coast. Shipping by rail would be about $3/b to $3.50/b with the tax break, while shipping by pipe to the Gulf Coast would be about $8.50/b to $9/b.
