Find Me A Home – Where U.S. Crude Would Move Next If the Economics Were Right

The race to load the first freely exported U.S. crude cargo was won by NuStar’s Corpus Christi terminal, edging out Enterprise’s Houston terminal, as the Theo T set sail for Italy on New Year’s Eve with Eagle Ford crude and condensate on board. Midstream companies are now set to fiercely compete, not just for bragging rights but for terminal fees, as more U.S. crude heads overseas. But where exactly will that crude go? With oil prices tracking below $40/Bbl and narrow differentials prevailing between U.S. and overseas crudes, breaking into new markets will be tough. Today we outline which markets are most likely to absorb U.S. crude supply.

High Expectations

The public rush to be the first to load a cargo has created high expectations for future U.S. crude exports. But as we said earlier this week, current narrow price differentials between U.S. benchmark West Texas Intermediate (WTI) and international marker Brent suggest limited exports will occur in the short term based on economics (see Yesterday – All My Exports Seemed So Far Away). Another expectation that is likely overblown is the idea that exports of light shale crude will take off because U.S. refineries are not configured to process these grades and only did so in recent years because they were made so cheap by the export constraint.     

It is true that over the past five years, the shale revolution has force-fed refiners a diet of ultra-light crude, requiring them to adjust by extensive blending with heavy imports (see Charge Of The Light Brigade). While the resulting mixtures may have the right API gravity to meet trading specifications, the refined product yield tends to come up short in terms of middle distillates such as diesel. Many U.S. refineries – particularly in the Gulf Coast region – are better configured to process imported medium or heavy crude grades but could not turn down heavily discounted prices for abundant light shale crudes. That experience suggests that ultra-light crudes may find more appropriate markets overseas in the new export era, leaving U.S. refinery engineers happy to be running their plants with imported medium grades again - instead of the Frankenstein blends of recent years. But the past five years cannot be brushed aside. A wave of investment in refining, encouraged by the surge in cheap domestic supply, has equipped U.S. refineries and condensate splitters to handle increasing volumes of shale crude. As a result that domestic investment may have rendered a large-scale exodus of light shale crude into the export market unlikely.

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A Window Into U.S. Crude and Condensate Exports

Given current market conditions, shale barrels are probably best refined at home for now - based purely on economics. But over the last couple of years, an extensive export infrastructure has been built out to accommodate permitted crude exports to Canada and processed condensate exports to Asia, Latin America and Europe (see CCATS Scratch Fever). Some of these shipments will continue on a contractual basis regardless of market economics. Looking at last year’s flows provides insight into future potential movements. 

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