A veritable flood of more than 3 MMb/d of new crude production from the US and Canada will come into the Houston region by 2015 via long awaited new pipeline infrastructure. The most immediate impact will be to back out light sweet crudes from the Gulf Coast region – as early as 2013. Today we assess how the changes will affect light sweet crude pricing.
In the last part of our recent blog series on the Ho-Ho pipeline reversal we looked at the entire PADD 3 Gulf Coast region supply/demand picture out to 2015 and projected that imports of light sweet crude would be backed out during 2013 by the flood of new crude arriving by pipeline (see The Bigger Gulf Coast Supply Demand Picture). Light sweet crude imports will no longer be required because increased flows of domestically produced light sweet crude will reach the Gulf Coast by 2013 to take their place. These light sweet crudes are predominantly from tight oil shale in North Dakota and South Texas but also from the older conventional West Texas Permian Basin. This time we are going to look at the pricing of light sweet crudes both before the flood of new crude (today) and after light sweet crudes are backed out in 2013.
Before the Flood
A backup of crude supplies in the Midwest is still dominating US crude oil pricing today. That has caused a stockpile at Cushing, OK and a $20/Bbl or higher discount for the US domestic light sweet benchmark West Texas Intermediate (WTI) crude against the Gulf Coast light sweet benchmark Light Louisiana Sweet (LLS) and the international light sweet benchmark Brent. The latest data from the Energy Information Administration (EIA) shows Cushing crude stocks for the week of November 30 2012 are still only 4 percent below their all time high (47.75 MMBbl back in June of this year).
The chart below shows the current price situation for the key benchmark light sweet crudes in the Gulf Coast region. The prices are averages for the month of November versus the WTI benchmark price at Cushing set to $0/Bbl. The WTI price at Cushing is the benchmark for US crude pricing because it is the delivery point for the NYMEX futures contract. Prices for WTI at Midland, TX are for delivery closer to the Permian Basin in West Texas where WTI is produced. During November 2012, Midland prices for WTI were discounted by an average of $8/Bbl to WTI at Cushing because of capacity constraints on the pipeline between Midland and Cushing (caused by surging crude production in the Permian Basin and refinery outages). Until new pipelines are opened up from the Permian direct to Houston in 2013, WTI has to travel to market from Midland to Cushing or further east into the already oversupplied Midwest (see New Adventures of Good Ole Boy Permian).
Comments
It appears that permits are going to be readily issued to export to Canada. If LLS becomes delinked from Brent it would seem that Eagle Ford oil being shipped from Port Corpus Christie would find it beneficial to be shipped to Eastern Canadian refineries instead of Gulf Coast refineries. This wouldn't require Jones Act vessels and consequently transportation costs shouldn't be much more to eastern Canada than they currently are to Houston.
Would these exports provide enough relief on Gulf Coast supplies to link LLS back to the Brent benchmark?
In reply to US to Canada exports by Bradley Wright
Good comment. Actually Valero is planning to do ship Eagle Ford crude to their refinery in Quebec and have applied for a crude export License to take crude out of Corpus Christi. You are correct that the lower shipping costs make that economic. I don't think East Coast Canadian demand would consume enough to prevent light sweet imports being backed out of the Gulf Coast so LLS will stil be delinked from Brent.
Excellent Article, do you have any idea of barging cost from Corpus Christi to St. James , and from Houston to St. James? Thx
How do you think the record low LLS-Brent spread(currently) will affect brent backwardation. Has. Brent become completely delinked from US prices or is there an indirect link(displacement of Brent-related blends?)