U.S. crude oil exports broke yet another record, spiking to 2.566 million barrels per day for the week ending on May 11. With U.S. shale surging and export terminals retooling on the Gulf Coast, the export surge is likely set to continue.
The export figures bounce around quite a bit from week to week, but the trend has been sharply up over the past year, rising from the 1.5-milion-barrel-per-day level, to routinely topping 2 million barrels per day more recently. The latest week put U.S. crude exports above 2.5 mb/d for the first time.
Obviously, the surge in U.S. shale production is a large part of the reason. U.S. refiners have swallowed up a large portion of the enormous increase in shale supply over the past few years, but there is a limit to how much they can take on. Moreover, the type of oil that refiners can handle is not perfectly suited to the type of oil coming out of Texas shale fields. Many of the Gulf Coast refiners are best equipped to handle medium and heavy types of oil, while shale drillers are extracting light and sweet oil from West Texas. That leaves a lot left over for export.
However, a strong driver of higher U.S. oil exports recently is the discount for American crude. The discount of WTI to Brent has widened this year, from around $2-$3 per barrel in early 2018 to a much more pronounced discount recently. In late April the discount hit $6 per barrel, and by mid-May the discount exploded to about $8 per barrel. The discount has continued to widen as the conditions between the American market and the rest of the world diverge. OPEC is keeping barrels off of the market, helping to drain inventories back to average levels. The supply losses in Venezuela and Angola have tightened the market faster than most analysts expected. Plus, the potential losses from Iran because of U.S. sanctions have also led to supply fears. All of this has put a premium on Brent relative to WTI.
Meanwhile, in the U.S., the story is the same that it has been for the past year: U.S. shale continues to add new supply at an amazing rate. To be sure, pipeline bottlenecks could significantly slow that growth rate, but any curtailment in supply has yet to show up in the data.
The end result is that cheap American crude makes it exceptionally attractive to foreign buyers. An $8-per-barrel discount is definitely large enough to cover the transit costs of shipping U.S. oil over long distances to Asia. U.S. oil exports to Asia are expected to hit a record high in July, according to Reuters, after hitting a record high in May at close to 25 million barrels. Reuters cites data from oil traders, who note that close to 10 supertankers, each carrying 2 million barrels, are queued up to load oil in the U.S. before they set sail for Asia.
“WTI Midland is coming across,” an unnamed oil trader told Reuters. WTI Midland can now compete against Middle Eastern oil in Asia. WTI Midland trades at a premium to Dubai benchmark quotes for delivery in Asia although there are significant differences in quality.
One hurdle for higher U.S. oil exports of crude oil is the inability of Gulf Coast ports to handle very large crude carriers (VLCCs). Ports along the Gulf Coast are inland and don’t have the width or depth to handle such large ships. Most Gulf Coast oil ports can handle AFRAMAX vessels, which carry 500,000 to 1 million barrels. But the number of ports that can handle even SUEZMAX ships – 900,000 to 1 million barrels – is limited, according to the EIA. VLCCs – at up to 2 million barrels – are simply too large.
To export oil from these ports, smaller ships are used to ferry oil from the port out to a VLCC. But that adds time and costs, which means that in order to economically support crude exports from these terminals, a wider discount is needed.
Right now, only the Louisiana Offshore Oil Port (LOOP) can handle VLCCs. And that port only brought that capability online in February. “Weekly U.S. exports of crude oil have surpassed 2 million b/d four times so far in 2018, and trade press reports indicate two of those instances—the weeks of February 16 and March 30—corresponded with weeks in which LOOP loaded a VLCC for export,” the EIA wrote in a report on May 16. Upgrades to a handful of other ports on the Gulf Coast are in the works, but those will take time to reach completion.
Should the price differential between WTI and Brent narrow, there could be a cap placed on the volume of crude exports leaving the U.S. However, for now, the discount is wide enough, leaving the window open for higher U.S. oil exports.