Two months ago, U.S. crude oil exports skyrocketed, and they have averaged 1.6 MMb/d since mid-September, driven by a Brent-WTI differential above $6/bbl — higher than it has been in over two years. At one point, the steep differential and surging exports were blamed on Hurricane Harvey, then on renewed OPEC discipline and a political risk premium associated with a shakeup in the Saudi hierarchy. But the reality is that these factors are only small pieces of the equation, with pipeline transportation bottlenecks from Cushing and the Permian down to the Gulf Coast being much more important factors in the widening Brent-WTI price spread. Today, we begin a blog series examining how these pipeline capacity constraints triggered the expanded price differential, and how the differential then enabled high crude oil export volumes.
As we have discussed many times here in the RBN blogosphere, the onset of the Shale Revolution in U.S. crude oil markets was heralded by a blowout in the Brent versus WTI/Cushing differential. That price spread spiked to $27/bbl in 2011, then again to $25/bbl in 2012, averaging a robust $17/bbl for those two years, primarily in response to pipeline capacity constraints between the storage and trading hub in Cushing, OK, and the Gulf Coast (see The Seven Gates of Hell). But new pipeline construction relieved those constraints, and the differential fell month after month before bottoming out in 2016 through mid-year 2017. As shown in the left graph in Figure 1, the Brent-WTI/Cushing differential averaged only $1.52/bbl in the first half of 2016, bumped up slightly to $1.71/bbl in the second half of last year, and widened to $2.68/bbl in the first half of 2017 (red dashed oval). But then, the Brent-WTI/Cushing differential reared its head anew, increasing to more than $6/bbl in the third quarter and the early fourth quarter, to average nearly $5/bbl since July 2017. It is not just Cushing — for the most part, the differential between Brent and WTI in the Permian has mirrored the Brent-WTI/Cushing spread.
As the Brent-WTI/Cushing differential increased, the economics for U.S. crude oil barrels that could be moved from Cushing and the Permian to Gulf Coast export docks improved accordingly, and exports ramped up. As shown in the right graph in Figure 1, exports averaged about 600 Mb/d during 2016, increased to 900 Mb/d in the first half of 2017, and then really took off in mid-September (green dashed oval). Exports reached a whopping 2.133 MMb/d for the week ended October 27. (For more on U.S. crude export infrastructure, see our blog series Exportin’ From the Free World – Crude Export Growth and Gulf Coast Infrastructure Needs, where we examine the existing pipeline, storage and marine-dock facilities along the Gulf Coast that together enable crude exports.)