That's the Good Stuff - Paraffinic versus Naphthenic Crudes; Implications for U.S. Exports

On December 18, 2015, Congress and President Obama ended the 40-year ban on U.S. crude oil exports to countries other than Canada. Today the arbitrage window doesn’t make much economic sense for most exports – Light Louisiana Sweet on the Gulf Coast is about the same price as Brent in the North Sea.  But the prospect of selling crude abroad remains tantalizing for a depressed U.S. upstream, and U.S. producers have begun to consider the possibilities for more significant export volumes.  But does the U.S. have the right stuff?  Will the qualities of U.S. crudes be competitive in global markets?  In today’s blog, we begin a series to consider the qualities of U.S. crudes that are likely to be favored by international crude buyers.

Last month we discussed some of the changing patterns of U.S. crude exports in Reach Out (WTI’ll Be There).  Until the export ban was removed, the vast majority of U.S. export barrels moving by ship went to Canada, peaking at 354 Mb/d in July 2014 but remaining above 300 Mb/d a year later in July 2015, according to our friends at ClipperData. (Note these do not include exports to Canada from elsewhere in the U.S. – such as Bakken crude-by-rail). Then things changed. Canadian refiners severely reduced their imports of U.S. Gulf Coast crude since October 2015, taking only 40 Mb/d in March 2016, due in part to the start-up of Enbridge’s reversed Line 9B in November 2015 (see Come On the Sloop 9B), which brings crude oil from Alberta into the Montreal region.   U.S. waterborne exports have remained at about the same level, but now most of the barrels are moving to Latin America, Europe and Asia instead of Canada.  It is a whole new world in the U.S. crude export market.

So far the non-Canadian crude exports have been more or less loss-leaders, with overseas refiners “trying out” new U.S. crude grades, such as Gulf Coast sweet (a blend of various light crudes, including Eagle Ford), as well as testing old grades such as West Texas Intermediate (WTI) which have not been run in refineries abroad for generations.  The major factors that influence an end-user’s purchase of crude include price, distance (i.e. delivered cost), timing and suitability for processing. Price - both relative and absolute - remains the primary factor in what crude oil grades are purchased by refiners.  Yet there are other fundamental factors that subtly shape buyers’ choices longer term: the physical characteristics of a crude grade beyond the basic indicators of crude quality, such as its gravity, as measured typically by its American Petroleum Institute (API) number, and its sulfur content (S%) by weight.

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