New US crude grade offers potential alternative to Iranian barrels

North Asian refiners are set to test a new US crude oil grade that some have touted could be a replacement for Iranian barrels, traders said.

Samples of US West Texas Light crude or WTL, which has an API of between 45 and 55, were heard to have been sent out to North Asian refiners, they added. Depending on results, and global appetite, the US Gulf Coast will be exporting many more cargoes of WTL in the future.

WTL is the name for production in the Permian basin that exceeds the API spec range for a barrel of West Texas Intermediate delivered at the Magellan East Houston (MEH) Terminal at the Gulf Coast. A barrel of traditional WTI typically ranges between 38-44 API and the BridgeTex and Longhorn pipelines cap WTI specifications at 44 API.

However, as new production in the Delaware section of the Permian Basin ramps up, the overall quality of domestic crude is getting lighter and sweeter and the opportunity to begin marketing the lighter crude coming out of the Permian has evolved.

"This crude can be considered for both splitter and CDU and it could be an alternative for Iran [barrels] with the US sanctions," said a trader with a South Korean refinery.

South Korea is among eight countries to have been granted a 180-day waiver by the US to the sanctions on Iran last November, enabling them to continue to import Iranian oil through May 4.

South Korean companies looking to procure cargoes after this period have to seek replacement barrels elsewhere until further clarity is given on whether there will be an extension.

Some market sources in Asia, however, have noted that the uncertainty around the API of the crude would mean that it is unlikely suitable for condensate splitters, which typically process condensates with an API of over 55.

"The API gap is wide, and I don't think it can be directly replaceable for condensates," said another trader. Iran's South Pars condensate, a favorite of many Northeast Asian condensate splitters, has an API of 61.6, while Australia's North West Shelf condensate, Asia's most liquid condensate grade, has an API of 63.

However, the US and Australia are producing slightly "heavier condensates" that could possibly substitute for Iranian barrels. Asian buyers have been familiarizing themselves with this "heavier" condensate and some companies have cited plant modifications to run heavier feedstocks coming out of the US and Australia.

South Korea has already emerged as a major buyer of US crude, and that is expected to continue. According to the US Energy Information Administration, South Korea is the second-largest importer of US crude behind Canada and has outpaced China's imports of US crude. South Korea took 86.15 million barrels of US crude in 2018, compared to about 64 million barrels in 2017 and 39 million barrels in 2016.

Lighter, sweeter US crude

In the Delaware, the percentage of WTL has remained fairly constant over the past five years, averaging about 25% of overall production, according to S&P Global Platts Analytics. After combining production from the different parts of the basin together, WTL likely made up 6%-10% of the nearly 4 million b/d Permian production during 2018.

While the percentage of WTL production is still rather small, it is expected that more of the grade will soon begin to hit the market. As new and expanded pipelines begin to come online later this year and into next, there will be added takeaway capacity and the ability to begin batching separate crude qualities that are flowing form the Permian.

Most of that new flow will be piped directly from the Permian Basin to the US Gulf Coast, where it can be consumed by domestic refineries or condensate splitters. However, much will be exported. The ability to batch certain quality bands straight to the water for export will allow global refiners to select certain barrels that best meet their needs.

WTL has been heard priced at a $1.50/b discount of WTI Midland in the Permian Basin. Sources said that they have yet to see if that discount is carried down to the Gulf Coast. One crude trader said he expects that WTL's "new crude" discount will eventually shrink as more refiners test and become familiar with it, but it is expected to remain at slight discount to WTI at the Gulf Coast.