USGC medium sour crude differentials soften as production, imports rise after Hurricane Ida

US Gulf Coast medium sour crude differentials to Cushing WTI have softened over the past two weeks, as supply of competitive grades has increased, compensating for the continued loss of Shell's Mars corridor production following Hurricane Ida's disruptions that began in late August.

Front-month Mars, now November, was last assessed by S&P Global Platts Sept. 24 at a $2/b discount to Cushing WTI, weakening from a $1.50/b premium Sept. 8.

Over the same period, Poseidon has weakened to a $3/b discount from a 40 cents/b premium, while Thunder Horse has softened to a $1.95/b discount from a $2.30/b premium.

All three grades are close to approaching pre-Ida levels.

16% of output still offline

After 95% of US Gulf oil and gas production was shut in near the end of August as the Category 4 hurricane made a Louisiana landfall, restoration efforts have stagnated and nearly 295,000 b/d of crude, or 16%, remained offline over a month later, according to the US Bureau of Safety and Environmental Enforcement.

S&P Global Platts Analytics projects that up to 55 million barrels of US Gulf crude production could be lost this year from storms, breaking the recent 2020 Atlantic hurricane season record of 115,000 b/d annualized.

"The recovery efforts were hindered largely by onshore facility damages and power outages, although the arrival of Hurricane Nicholas around the middle of September further exacerbated the restoration process and caused at least one platform -- Shell's Perdido -- to temporarily shut in," said Sami Yahya, S&P Global Platts Analytics analyst. "A large portion of the remaining offline volumes can be attributed to Shell's Mars-Ursa corridor output that is handled by the company's West Delta-143 transportation hub, which sustained severe damages due to Ida."

Indeed, Shell said its Olympus platform will not resume production until well into the fourth quarter, while its Mars and Ura facilities are not expected back until early 2022. The West Delta-143 hub is a critical chokepoint for moving the medium-sour grade, Mars corridor crude along the Mars Pipeline network, which moved 484,000 b/d in the second quarter.

The tighter supply pushed up Mars and other grades until new suppliers were found.

The Shell-operated Amberjack Pipeline is fully back online to Port Fourchon and Clovelly, Louisiana, Shell said. The pipeline can move comparable medium-sour grades from US Gulf fields, including Chevron platforms and other producers. The return of the Amberjack network has helped restore Mars pricing differentials back to pre-Ida levels.

S&P Platts Analytics expects about 100,000 b/d to return in mid-November and the remaining 70,000 b/d or so in the first quarter of 2022.

For now, Louisiana refiners will lean on Amberjack and others sources of crude oil to maintain the flows of gasoline, diesel and jet fuel.

Imports on the rise

Price differentials have softened not only on the partial return of US Gulf supply, but on the availability of comparable imported crudes.

US crude imports jumped to 6.5 million b/d for the week that ended Sept. 17 from 5.8 million b/d during the week prior, according to the US Energy Information Administration.

And US Census data shows a recent increase in crude imports, primarily from Latin America. Roughly 2.2 million barrels of crude from Colombia were imported during the seven days ending Sept. 23, up from roughly 1 million barrels the prior week, and zero barrels the week before that, Census data shows.

Recent increases were also seen from Ecuador and Brazil.

Medium and heavy sour crudes from the Middle East also are well-supplied, which offers competition for Latin American grades in Asia.

And while current Western Canadian Select price differentials do not favor bringing more WCS crude by rail to USGC refiners, more Canadian crude could move in the coming weeks once Enbridge's Line 3 Replacement project is completed, ending much of the pipeline bottleneck into the US.

Zack Van Everen, senior analyst at East Daley Capital, said refiners are considering other creative domestic options apart from imports, including moving more volumes of West Texas Sour -- which is maintaining a pricing premium after Ida -- along Texas-to-Louisiana pipelines.

Onshore, pipelines from Houston and Beaumont, Texas, including Shell's 375,000 b/d Zydeco Pipeline and Energy Transfer's 480,000 b/d Bayou Bridge Pipeline can move more heavier crude grades, because neither of them were operating at full capacity before the hurricane season, Van Everen said.

"The still-operating refineries in Louisiana and the Northeast may see upside in utilization as well to offset the supply gap along the East Coast," Van Everen said.