The Gulf Coast was ravaged by Hurricane Harvey, and the effects are going to take time to wear off, but the situation has also made U.S. crude exports much more competitive.
Harvey knocked out more than 4 million barrels per day (mb/d) of refining capacity for a few days, but three weeks on from the storm, there is still some refining capacity offline. As of September 19, an estimated 15 of the 20 refineries affected in Texas and Louisiana were back to normal production, or close to normal production, according to IHS Markit. Another four were planning to restart operations.
But that does not mean that all is well. For example, the U.S.’ largest refinery, the Motiva facility in Port Arthur, is still producing below capacity. Valero’s Port Arthur refinery caught fire earlier this week, an example of the perils of restarting a major refinery. ExxonMobil’s Baytown complex has restarted some production but is also not back to full capacity.
The refinery disruptions have led to much smaller pool of refined products than would have otherwise been the case. That, in turn, has led to a buildup in crude stocks – the EIA reported another 4.6 million barrel increase in crude inventories in mid-September, the third consecutive week of sizable increases.
But because global demand is still strong, the downstream bottleneck has led to a disconnect between the U.S. crude benchmark and its international counterpart. The discount for WTI relative to Brent is at its widest point in more than two years at nearly $6 per barrel, only slightly down from earlier this month. That makes sense – there is something of a surplus trapped within the U.S., while supplies are much tighter internationally.
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That wide disparity between Brent and WTI probably won’t last because U.S. crude is now incredibly competitive, and will likely be snatched up by buyers around the globe. “The export window is wide open,” Michael Wittner, global head of oil research at Société Générale, told the Wall Street Journal.
The cost of transport has to be factored in, a matter of a couple of dollars per barrel. But that spread looks wide enough to make U.S. crude worth the trouble. “Get to a $4 spread and you can take it anywhere in the world," R.T. Dukes, an oil expert with Wood Mackenzie, said in an interview with the WSJ. The WSJ said that Occidental Petroleum has seen an uptick in exports recently, inking new deals with buyers in South Korea, India and China.
Exports were interrupted in the immediate aftermath of Harvey, falling from 900,000 bpd at the end of August to just 153,000 bpd in the first week of September. But exports have quickly ramped up as facilities have come back online – exports averaged 928,000 bpd in the week ending on September 15.
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Some analyst see those figures going much higher. The highest weekly total for U.S. exports was only about 1.3 mb/d, a one-off occurrence back in May. But the Brent-WTI spread, widening to nearly $6 per barrel, could result in a temporary surge in exports. Stephen Wolfe, an analyst at oil trader Trafigura Group, told the WSJ that the U.S.’ max export capacity is probably around 1.8 mb/d. “We’re going to really test that number over the next few weeks, because we have excess barrels we need to move out,” Stephen Wolfe told the WSJ.
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The spread will narrow as exports ramp up, but it has remained open for a few reasons. In addition to refinery outages in the U.S., which led to a buildup in U.S. crude, European refiners have ramped up to make up for the shortfall, which has actually added more upward pressure on Brent prices. Also, OPEC has improved compliance in recent weeks, taking more barrels off of the market, a dynamic reflected in the Brent price. Storage is building up in the U.S., but it is declining elsewhere: temporary floating storage figures are down, and Bloomberg reports that the key storage hub in South Africa is al so seen stockpiles dwindle.
Still, it will take time for conditions in the U.S. compared to the rest of the world to normalize. Higher U.S. oil exports is one mechanism that will help level out these disparities.
By Nick Cunningham of Oilprice.com
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I suspect that most, and perhaps virtually all, of the post-2014 build in US C+C inventories consists of condensate and not actual crude oil.
Based on EIA data, about 40% of US Lower 48 C+C production exceeds 42 API Gravity, which is the maximum upper limit for WTI crude oil.