The U.S. Congress is on the verge of passing a major budget deal that includes some of the largest changes to energy policy in some years. Tucked into the budget bill is a repeal on the ban on crude oil exports from the United States, a highly sought after goal on behalf of the oil and gas industry.
In exchange for lifting the export ban, Republicans agreed to extend tax credits for wind and solar for five years.
Just as the oil export ban is about to be lifted, the spread between WTI and Brent has narrowed to its lowest level in years. No doubt part of the reason that the differential has all but vanished is that the intentions of Congress were telegraphed to oil markets over the past few weeks, so the markets have already taken the move into account to a certain degree.
But there are underlying reasons to explain the shrinking spread between Brent and WTI. First let’s look at why the enormous differential opened up in the first place.
U.S. oil production surged from 5.3 million barrels per day in early 2010 to a peak of 9.6 million barrels per day in April 2015. The rapid rise in output, coupled with the ban on exports, trapped some oil within the borders of the United States. That edged out a lot of imports. Domestic refiners turned much of that crude into gasoline, diesel, jet fuel, and other refined products, but refiners also had trouble keeping up with the rapidly rising production. Too much oil within U.S. borders forced WTI to begin trading at a rather large discount relative to the Brent benchmark, which tends to reflect international conditions. Related: Fed Rate Hike Bad Timing for Crude Oil
At times, the spread was very large, hitting a peak of nearly $30 per barrel in September 2011. Between 2011 and 2013, the spread was consistently in double digits, often between $10 and $25 per barrel.
However, since early 2014, the spread began to narrow. A large part of that was because of greater pipeline capacity that relieved localized bottlenecks within the United States. Related: Gazprom Rapidly Losing Grip On European Markets
But another reason that the differential between WTI and Brent shrank over the past two years is because the Obama administration has already greenlighted a small volume of crude oil exports. In 2014, the Commerce Department gave the approval for exports of ultra-light forms of oil known as condensate. Companies that put their light oil through a minimum level of processing could essentially begin exporting. With the stroke of a pen, some of the excess supply began seeping out through U.S. borders.
In August 2015, the Commerce Department also approved oil swaps with Mexico, allowing light sweet U.S. oil to reach Mexico, in exchange for Mexican heavy crude. The deal suited both sides, and marked another hole in the oil export ban. The 40-year old export ban has been dealt a death by a thousand cuts by the Obama administration.
Furthermore, with the collapse of crude oil prices since 2014, U.S. oil production growth has ground to a halt and even reversed. As of September, U.S. output is down from the April peak by at least 300,000 barrels per day, and likely much more than that in recent months. At the same time, OPEC has increased output significantly since 2014. Saudi Arabia added about 500,000 barrels per day over the past year, and Iraq has added about 1 million barrels per day. Related: Congress To Lift Export Ban, WTI Crawls Closer To Brent
In short, the glut of U.S. oil supplies has eased, both because of a fall in production and because some oil is beginning to be exported. Globally, however, the supply overhang has only grown worse.
That brings us to where we are today, with the Brent/WTI spread shrinking to less than $1 per barrel. That may not be a large enough price difference to justify large-scale oil exports. By some estimates, WTI needs to trade at least $4 below Brent in order for exports to make sense. “We don’t believe at current spreads there is any impact, as exports would not be profitable,” Amrita Sen, chief oil economist at Energy Aspects Ltd, told Bloomberg.
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The conditions could change at some point in the future, but for now, with such a small difference between WTI and Brent, lifting the crude oil export ban may not be such a big deal.
By Nick Cunningham of Oilprice.com
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During the last few months the US imported between 4.38 million bpd and 5.21 million bpd more of oil and oil products than it exported.
That being the case, oil exports can only be used to export types of oil that our refineries do not want. For this reason, they are a good idea but not a big deal.
Simularly, we are a net importer of NG and yet are being touted as a giant exporter in the near future.
I'm not talking the typical traders smoke and mirrors, I've got my magical hokum/snake oil tie on but simple economic reality.
WTI needs to trade at a 4 discount to attract buyers?
The most valuable fractions produced at a refinery in terms of $/gallon of product are the fuel fractions (gasoline, diesel, kerosene, jet fuel).
US oil. especially 50+ API condensate, which is what is produced in the shale plays in refining yields 20-30% more by volume of the fuel fractions.
If you have a choice of two feed stocks and for simplicity sake, after refining they both produce 30 gallons of refined product.
Feed stock A produces 20 gallons of fuel fractions and 10 gallons of non fuel fractions.
Feed stock B produces 25 gallons of fuel fractions and 5 gallons of non fuel fractions.
Fuel fractions are worth twice per gallon what non fuel fractions are.
Which feed stock makes more money for the refiner?
Feed stock A.
Which one is the refiner willing to pay more for?
Feed stock A.
The lighter that the crude is (higher the degrees API), the larger the % by volume that it will produce in fuel fractions.
Additionally, it is in terms of pollution a cleaner feed stock to refine.
I've been a chief process design engineer for 35+ years and one thing that I know by both education and experience is what is stated above.
Based on simple yields that the various feed stock that will produce the 50+ API oil that comes from the various shale plays yields a higher fraction of fuel fractions than does light Arabian or most other "light oils".
On that basis WTI coming mostly from the shale plays in the US has a higher value than does light Arabian, and will sell at a premium to other oil, not a 4 discount.
I guess you go into a Mercedes dealership and tell them that a new Mercedes needs to sell at a discount to a new econobox.
I appreciate that if by bravado, bluster, appealing to self made authorities you can stampede the heard mentality of most investors in the direction to maintain the discount from Brent that you, the other speculators, those involved in residuals and other areas that benefit from the discount (like the four refiners that fund the lobbyist with CRUDE) that you and others you are involved with benefit economically.
Lets try this one.
Show me documentation that WTI must be sold at a discount of 4 to Brent to sell.
The ban doesn't become effective till 30 days from last Friday, yet the market before that bill became law was narrowing to less than 2 and post selling it is at 1.50 (the cost of storing a BBL for 30 days plus the time value of the money).
If it required a 4 discount, why is the discount at a 1.50 30 days before the oil can be exported?
Me thinks that this is snake oil hokum that the traders/speculators use to try to be believable.
Reminds me of the great & powerful OZ until a little dog pulled their curtain back.
I'm going to call you on this, considering that the market spoke 30 days ago and the discount declines every day, the market agrees with me sounds like no one but the speculators & traders whose heads spin one direction and then the other, heads bob up and down as well as side to side, hands moving al the while talking accompanied by smoke, mirrors, laser light shows and grand music.
Those folks that have all those physical dynamics going on while talking are ignoring the basic economics and trying to employ the magicians/illusionist tactic of misdirection.
Sorry to disagree with you Nick (actually the market is disagreeing with you and becomes more disagreeable with you every day regarding the discount of WTI to Brent), but on this specific point you are dead wrong.