Commodities 2021: US crude oil exports face challenges amid lower output

US crude oil export flows that managed to stay afloat for much of 2020 are expected to sink in 2021 as decreased US output and recovering domestic refinery runs will mean fewer barrels to export.

Production is expected to average only 10.44 million b/d in 2021 but will gradually recover to pre-COVID levels around 12.8 million b/d by late 2023, according to Platts Analytics.

With fewer barrels available for export, total US crude exports are expected to decline to an average of 2.2 million b/d during 2021, down 1.0 million b/d from 2020 and far below the pre-COVID forecast of around 4 million b/d.

While the COVID-19 vaccine rollout has provided some hope that a "return to normal" is around the corner, full recovery of oil demand is likely to be a slow, bumpy ride. And the export market is no exception.

During the five years since the US federal crude export ban was lifted in Dec. 2015, export flows from the US Gulf Coast quickly accelerated from zero to becoming integral component of international supply.

US crude exports hit an all-time high of 4.15 million b/d for the week ended February 28, 2020 and volumes were expected to average around that 4 million b/d mark most of the year as US production continued to climb.

However, the coronavirus pandemic wreaked havoc on the oil market and demand for crude plummeted as the global economy suffered its deepest contraction since the Great Depression.

US crude exports managed to keep pace with 2019 levels and averaged 3.1 million b/d in 2020, according to EIA and U.S. Census data. However, the ripple effects of 2020 and crude oil production declines in the US will have an impact on export flows for months to come.

US oil production shut-ins and a decline in drilling activity has led to about a 1 million b/d year-on-year decline in overall production for 2020, averaging 11.23 million b/d.

Prices and arbitrage

Price spreads and arbitrage opportunities for exports will continue to be narrow, sources expect – adding to the already challenging task of selling waterborne cargoes.

Additionally, any new production and supply returning to the market may serve as direct competition to light sweet US crude, such as Libyan output rising to 1.2 million b/d following a ceasefire in the country.

Since its launch June 26, Platts American GulfCoast Select, which represents FOB cargoes loading 15 to 45 days forward, averaged just a 98 cent/b discount to Dated Brent. Export economics into Northwest Europe were often unfavorable, with the Platts US-to-UK Aframax freight assessment averaging $1.55/b over that period.

Late 2020's closed arbitrage to this market stands in stark contrast to 2019, when WTI FOB USGC averaged a $2.12/b discount to Dated Brent. That year, the US-to-UK freight assessment averaged $2.55/b, with low rates mid-year contributing to favorable arbitrage economics.

Export Infrastructure

Several key export infrastructure projects hang in the balance as developers evaluate the need for these capital intensive ventures amid tough export fundamentals.

Earlier this month the Port of Corpus Christi and Phillips 66/Trafigura joint venture Bluewater Texas project finalized leasing and pipeline easement agreements for the planned deepwater, crude oil export terminal.

The proposed Bluewater terminal is one of four similar projects planned along the Gulf Coast that are pending applications to build offshore crude terminals that would allow VLCCs to load to a 2 million-barrel capacity in deeper waters without the need for ship to ship transfers.

The Bluewater project still needs federal approvals from the US Maritime Administration and the US Coast Guard. It's a similar situation that faces other pending export projects along the US Gulf Coast.

Enterprise Products Partners and Enbridge are planning the Sea Port Oil Terminal, called SPOT, offshore of the Houston Ship Channel, while Sentinel Midstream's Texas GulfLink also is planned for offshore Houston. Farther east, Energy Transfer recently applied to build the Blue Marlin Offshore Port near its Nederland, Texas hub.

Texas GulfLink is the only project on the books to have already received a draft environmental impact statement from MARAD.

In Corpus Christi, which became the top crude export location in the United States in 2020, a multi-year dredging project that will deepen the ship channel to about 54 feet continues. The initial phase of the project that will deepen access from the mouth of the ship channel to loading facilities near Ingleside is expected to be completed in the fourth quarter of 2021 with additional access completed in the second quarter of 2022.

Some recent news that planned export projects are continuing as normal, on Dec. 29, Buckeye Partners announced startup of operations at its second deepwater dock at South Texas Gateway and first loading of a VLCC at the terminal.