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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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The Biggest Challenge For U.S. Oil Exports

As Saudi Arabia and Russia grapple with both the geopolitics and economics of continuing or stopping their one and a half year long oil production cut reached between OPEC and non-OPEC members in early 2017, U.S. oil exports are slowly making their way into Asia.

American companies will export some 2.3 million barrels per day (bpd) of oil next month and over half of that (1.3 million bpd) will find their way to Asian markets, Reuters said, citing a key executive with an U.S. oil exporter. This follows a record 2.6 million bpd of oil that the U.S. exported just two weeks ago.

Increased oil exports into Asia come as the price differential between global oil benchmark Brent crude and U.S. benchmark NYMEX-traded West Texas Intermediate widens. That price differential is currently around $9 per barrel, offering arbitrage opportunities for producers and huge savings for Asian refiners who buy U.S. crude oil.

Moreover, the discount between the price of Brent crude and WTI produced in the Permian Basin widened to nearly $11 per barrel in April, marking the the largest monthly spread in almost four years. In April, Brent futures sold for an average $72 per barrel, while Permian crude sold for just $61 a barrel.

As long as price differentials remain, U.S. oil exports will continue to chip away at both Saudi and Russian market share in Asia, the world’s largest oil consuming region, led by China, Japan, India, and South Korea. China surpassed the U.S. in annual gross crude oil imports in 2017, importing 8.4 million bpd compared with 7.9 million bpd for the U.S., according to a report by the U.S. Energy Information Administration (EIA).

One problem for U.S. oil exporters, however, is that many Asian refineries are configured to process heavier crude blends and have to use lighter, sweeter U.S. oil to blend with other crude grades. For refiners that can process lighter U.S. crude the price differential is a boon and ensures that U.S. oil exports will continue to grab Asian market share. Yet, the U.S. also exports other grades like Mars and Southern Green Canyon which are medium sour grades as well as Bryan Mound Sour.

Another and more complicated problem for U.S. oil exporters are bottle necks and lack of pipeline infrastructure to move U.S. crude to market. This is particularly acute in the Permian Basin which has a lack of pipeline takeaway capacity to transport oil to Houston or Corpus Christi, where it can be loaded on tankers for export. It’s a story of U.S. producers being the victim of their own success. Related: Why U.S. Oil Exports Are Only Heading Higher

A report earlier this month by the Federal Reserve Bank of Dallas said that lack of pipeline capacity hasn’t yet stymied production but that could change later this year or by the middle of next year if more pipelines are not built.

Another variable in the equation is just how much oil is the U.S. geared to export. Moving from a current average of just over 2 million bpd to top off at what some analysts claim could be a maximum of capacity of 3.5 to 4 million bpd will take more some maneuvering. The problem with trying to determine the exact export figure is that most terminal operators and companies don’t disclose capacity, while the U.S. DOE doesn’t keep track of the amount.

Chinese demand intersects U.S. oil

Pipeline problems and capacity questions notwithstanding, China is poised to import more U.S. crude as Chinese President Xi Jinping offers a trade war olive branch of peace to President Trump’s insistence that Beijing do more to trim the massive trade deficit between the two economic power houses.

“To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States’ goods and services,” the White House said last week after a round of talks between American and Chinese trade negotiators.

“Both sides agreed on meaningful increases in United States’ agriculture and energy exports. The United States will send a team to China to work out the details” and will “continue to engage at high levels on these issues and to seek to resolve their economic and trade concerns in a proactive manner,” the statement added. Related: Are We About To See Another Correction In Oil Prices?

The largest buyer of U.S. crude going forward will be state-run Sinopec, the largest oil refiner in the world, which operated 5.6 million bpd of total oil processing capacity in 2014 and has considerable market share in Asia for selling refined petroleum products. Moreover, Unipec, China’s state-run oil trader is engaged in a pseudo-price war with Saudi Aramco over the price increases of its Arab Light crude, which lends more support for U.S. crude exports into China.

In fact, Unipec has purchased around 16 million barrels of U.S. crude oil for loading in June, marking the biggest volume ever to be lifted in a month by the company, a report in Hellenic Shipping News said this weekend, citing industry sources.

Unipec is expected to receive the June-loading U.S. crude cargoes in July/August while the trading arm of Sinopec said it would raise its shipments from the U.S. to China by around 80 percent to 200,000 bpd in 2018 from around 112,000 bpd last year, the report added.

One Unipec source said that the increase purchases was only due to the Brent/WTI spread and not due to unfolding trade talks between Washington and Beijing. But at the end of the day, it’s both. The price arbitrage between U.S. oil and Brent along with top-down pressure from Beijing to procure more U.S. oil will help American oil exporters make incursions into Asia and China’s oil market, though those incursions, due to current restraints on U.S. oil imports will be marginal at first and incremental.

By Tim Daiss for Oilprice.com

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