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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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U.S. Oil Has One Fatal Weakness

U.S. crude oil production is again on the rise, and exports of American crude are smashing records.

But most of the U.S. oil production is light tight oil, and American exports—especially those of very light sweet crude—may hit a demand constraint next year, Bill Barnes, director of energy consultancy Pisgah Partners, writes in Petroleum Economist.

Oil production in the U.S. is currently expected to reach an all-time high at an average 9.9 million bpd next year. In recent weeks, U.S. crude oil exports beat records, and surpassed the 2-million-bpd mark for the first time ever in the week to October 27.

Last year, 51 percent of the 8.4 million bpd of crude oil produced in the Lower 48 States was light oil, or less dense oil with an API gravity of 40.1 or above, EIA data shows. The higher the API gravity, the lighter the oil. So far this year, much of the lower 48 states’ crude oil production had 30.1 or higher API gravity.

Due to the wide discount of the U.S. benchmark WTI to Brent in recent months, American exports have seen record-high levels.

Yet, according to Pisgah Partners’ Barnes, there are several demand and supply factors that may limit the buyers’ willingness to import extra light U.S. oil. Related: Goldman: OPEC Deal Far From Certain

One is that Libya and Nigeria—the two members exempt from OPEC’s production cuts—have started to gradually recover their production that had been plagued by militant and civil strife last year. And they are exporting light sweet crude oil varieties to refiners.

Also, consumption of various oil products outside the U.S. “argue for processing middle-gravity crudes such as Arab Light, Iranian Light and Russian Urals, rather than extra-light barrels such as 48°API gravity Eagle Ford,” Barnes said.

Import data about U.S. crude sales in some Asian market suggests that Japan and India, for example, aren’t looking for extra light barrels from the U.S. Japan’s crude oil imports from the U.S. have a weighted average API gravity 36.9, Barnes writes, quoting data by the Petroleum Association of Japan. India, for its part, is said to have recently imported WTI and Southern Green Canyon, whose API gravity is 40 and 28, respectively.

Related: Meet The World’s Most Powerful Bitcoin Backers

With exports of the less light varieties, the extra light tight oil barrels are either entering the U.S. refinery system or storage tanks, Barnes argues. Since refineries have technical limits to processing the extra light oil, many barrels may end up in storage. U.S. oil inventories have been growing ‘lighter’ while medium and heavier grades are exported, Barnes says, quoting analysts.

Although refineries will adapt to process more of the extra light U.S. oil in the medium term, in the short term the market may be limited in its capability to digest higher volumes of the very light U.S. varieties. Next year the extra light crude market will continue to see a glut, resulting in a narrower sweet-to-sour crude oil spread and a persistent WTI discount to Brent, says Barnes.

By Tsvetana Paraskova for Oilprice.com

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  • Bill Simpson on November 28 2017 said:
    Simple solution - get the Keystone XL Pipeline finished. Canada has all the heavy oil from the tar sands we need to keep refineries on the Gulf Coast running.
    As long as it is finished before Trump leaves office, probably in January 2021, too much light oil is no problem. And you never know, if the world economy continues to finally recover from 2008, and expand like it has been doing for the last 18 months, even Trump might get reelected. Even the Europeans, who take over a month off work every year, (Americans get two weeks, if they are lucky) are experiencing growth, at least until the Chinese New Silk Road closes all their factories like they, and the Mexicans, did to the US Midwest. Those Europeans will soon discover how fast the Chinese are closing the manufacturing technology gap.
    Most people put money in their pocket before anything else when they vote. Just look at the war in Syria, with 320,000 people dead, most victims of Assad's barrel bombs and Russian jets. How much coverage do you see of it on the network evening news? Virtually none. They rather cover royal marriage announcements, the really important stuff.
  • zorro6204 on November 28 2017 said:
    The obvious solution is to pump a ton of Canadian heavy down to mix it, like Venezuela does, and buy more heavy oil from Venezuela . . . oh, yeah, no pipeline, and no government. Oh well, if the stuff gets any lighter, maybe they can just ship it out as diesel.
  • Jeffrey J. Brown on November 29 2017 said:
    In my opinion, increasing global condensate production is obscuring an "Undulating Plateau" in actual global crude oil production since 2005. Of course, what the EIA and other agencies call "Crude oil" is actually Crude + Condensate (C+C).

    Following are some relevant data through 2016:

    Global Gas:

    2002: 245 BCF/day

    2005: 270

    2016: 343

    Global C+C:

    2002: 67 million bpd

    2005: 74

    2015: 80

    2016: 81

    Global Gas to C+C Ratios:

    2002: 3,660 CF/BO

    2005: 3,650

    2016: 4,200

    Given that condensate is a byproduct of natural gas production, I suspect that virtually all of the post-2005 increase in global C+C production consists of condensate and not actual crude oil, as evidenced by the 2005 to 2016 increase in the ratio of global gas production to global C+C production.

    Meanwhile, global discoveries are down:

    Global oil, gas discoveries drop to 70-year low: Rystad Energy

    Related article in the WSJ linked below, and a pretty good quote from the article is shown below.

    Investors Question Oil Output in Permian Basin, America’s Fastest-Growing Field
    Worries mount after Pioneer reported its Permian wells are producing more gas than expected



    . . . someone who described himself as a former Pioneer petrophysicist raised alarms in a post on LinkedIn, predicting that “ALL oil shale wells…will die a disappointing and gassy death.”

    End Excerpt.

    The bottom line in my opinion is that actual global crude oil production has been on an Undulating Plateau since 2005, while global natural gas production and associated liquids, condensate & NGL, have (so far) continued to increase.

    In effect, the trillions of dollars spent on global upstream capex since 2005 only served to keep actual global crude oil production approximately flat. So, given the cutback in global upstream capex, what happens to actual global crude oil production going forward?
  • Jeffrey J. Brown on December 01 2017 said:
    Bloomberg: MIT Study Suggests the U.S. Is Vastly Overstating Its Oil Output Forecasts (12/1/17)

    WSJ: U.S. Shale Juggernaut Shows Signs of Fatigue (10/5/17)
    Forecasts that abundant American oil can permanently meet global needs may be ‘myth,’ company leaders warn

    Future oil production is notoriously difficult to predict, and a surge in prices could certainly improve the economics of American shale. But a growing chorus of oil industry leaders, including some shale trailblazers, believes U.S. growth may peak sooner than government forecasters have anticipated—a development with ramifications for global oil markets.

    In recent years, shale production has reliably filled any voids in world supply, effectively taming volatile price gyrations. Potential limits to shale growth call into question predictions that this trend will continue in the future.

    “There are no new shale plays that have come forward,” said Mark Papa, chief executive of Centennial Resource Development Inc. and former CEO of EOG Resources Inc. “Their ability to spew forth infinite streams of oil is really just a myth.”
  • John Brown on December 01 2017 said:
    What all this tells you is there is a glut of oil out there and it isn't going away. All this collusion and nonsense about OPEC extending their cuts and Russia going along? So what? All this that readily available capacity taken off the market, with all those countries dying to cheat and sell more oil, and U.S. production soaring with oil closer to $60 than $50. There is no reason right now based on supply for oil to be over $30 to $40 and the longer OPEC and Russia try and cut back to raise the price the more tempted many will be to cheat, and the more the U.S. and others will increase production.

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