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The Permian Boom Is Going Bust

Oil companies are already beginning…

Jude Clemente

Jude Clemente

Jude Clemente is Principal at JTC Energy Research Associates, LLC. He holds a B.A. in International Relations from Penn State University, with a minor in…

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The Endless Opportunities For U.S. Oil Exports

Once unthinkable, in December 2015 the U.S. decided to lift the nation’s 40-year ban on crude oil exports driven by a boom in domestic shale, tight oil production. Until then, crude exports just went to exempted Canada. Now more than 24 months later, U.S. oil exports have continued to change the dynamics of the global oil market.

The U.S. has been gaining market share thanks to the ongoing agreement between OPEC and key partners like Russia to cut production by 1.8 million b/d. The WTI-Brent spread peaked at $8 per barrel in September, when refinery shut-ins from Hurricane Harvey glutted the U.S. market and helped exports spike by the end of October. The spread has been falling since, but U.S. crude exporters are highly competitive when Brent has a $4 premium.

Since 2008, U.S. crude oil production has more than doubled to 10.3 million b/d, record weekly output per EIA data. U.S. oil demand, meanwhile, has been flat in the 18.5 to 19.7 million b/d range for a decade, so the export opportunity has been allowed to open as output has grown.

And the tight oil that has been the basis of the U.S. revolution is a lighter, less viscous type, with API gravity of 40 degrees and higher. Yet, the country’s huge 18.6 million b/d capacity refining system is generally configured to process heavier crudes from Canada, Mexico, and Venezuela. This mismatch helps explain why the U.S. has been exporting large volumes of crude but has also been importing it, taking in 7.9 million b/d so far this year.

Additionally, heavier crude types can actually be more desirable because they are less expensive and thus refiners capture higher margins when producing products from these grades. It is also important that refineries operate all their units as close to capacity as possible to maximize returns and pay for the pricey equipment required. This has also allowed the U.S. export window to open.   Related: How Oil Trade Is Getting An Efficiency Boost

China, the world's 2nd largest oil consumer, has ramped up imports from the U.S. American crude shipments to China went from nothing prior to 2016 to a record 0.4 million b/d in January, worth $1 billion. As for the other most important incremental market, “since its crude oil is $2 per barrel cheaper than the imported Dubai crude, inclusion of U.S. for imports is a very good move for India,” notes CARE Ratings.

Overall, however, oil products constitute about 75-85 percent of all U.S. oil exports. Neighbor Mexico has been taking in about 60 percent of U.S. gasoline. But presidential front-runner (election in July) Andrés Manuel López Obrador has made upgrading the country’s refinery system a top priority. Mexico’s refining capacity has stagnated at around 1.5 million b/d for a decade – despite the population rising by nearly 20 percent to over 130 million people.

Looking forward, although U.S. exports to Mexico will remain high simply because of proximity, the main purpose of the country’s historic 2013 Energy Reforms was to produce more energy domestically, not to increase reliance on the U.S. Mexico extracting crude oil, sending it to the U.S. to be refined, and then importing those products is an obvious economic drain. As such, we can expect that an increasing number of countries will have the chance to shop for U.S. oil.

(Click to enlarge)

By Jude Clemente for Oilprice.com

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