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US crude navigates world in 2 years after repeal of export ban

In the two years since Congress voted to end the crude oil export ban, U.S. shipments abroad have surprised and disrupted international markets.

Navigating the world from Italy and the U.K. to China and Singapore, U.S. crude cargoes have skyrocketed with no signs of slowing down or tapering off. And because of the wide spread between the world's primary price benchmarks, American shale oil continues to reach new destinations.

How much more crude oil the U.S. will export in the near term, however, hinges not only on global demand but also on additional infrastructure investments.

According to the U.S. Energy Information Administration, 26 countries imported U.S crude during the first half of 2017, up from 17 in the first half of 2016. China has become the second-largest importer after Canada, which was exempt from the 40-year-old ban. The U.S. exported an average of 1.47 million barrels per day of crude oil in September, according to the EIA. If it sustained that pace for a year, the U.S. would be just outside the top 10 oil exporters in the world.

"The wide range of barrels on offer can compete on both price and quality with global crudes in key demand growth regions, with U.S. medium, sour barrels competing head on with Mideast OPEC crudes while light, sweet shales can displace West African and Atlantic barrels," analysts at RBC Capital Markets said in an Oct. 19 note to clients.

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The price difference between North Sea-based Brent crude oil and Cushing, Okla.-based West Texas Intermediate, or WTI, crude oil, which are used as reference benchmarks for buyers and sellers, has enabled U.S. producers to reach Asian demand centers.

"The U.S. used to be a massive importer, so the point of arbitrage was basically at Cushing, meaning Brent had to land and get all the way up there. So the transportation differentials worked in favor of WTI," Rice University's Ken Medlock, a renowned energy expert, said in an interview. "Now it's totally different because crude is trying to find its way out. The point of arbitrage is offshore, it's likely somewhere in West Africa, and the cost to get to there from Cushing is higher. ... WTI is now transportation disadvantaged, so it will remain below Brent."

Those lower WTI prices incentivize American producers to export surplus crude, turning on another tap in what Medlock calls the oil market "bathtub," and make U.S. barrels increasingly competitive in foreign markets. But as more pipeline takeaway capacity comes online in 2018, Medlock noted, decreasing transportation congestion should cause the Brent-WTI spread to narrow. On Dec. 18, WTI crude futures sold for about $6 per barrel less than Brent crude oil futures.

OPEC's helping hand

After two years of low and volatile crude oil prices, OPEC members agreed in November 2016 to cut oil production by approximately 1.2 million barrels per day as part of a deal that also required key non-OPEC producers to curtail output by 600,000 barrels per day. On Nov. 30, OPEC ministers committed to a nine-month extension of that agreement through the end of 2018.

According to Bob McNally, founder and president of energy consulting company The Rapidan Group, OPEC and its partners have welcomed U.S. crude exports as a way to target inventory cuts.

"OPEC has been vexed by this stubborn oil glut that hasn't gone away as fast as they had hoped, so they want to drain the most visible oil storage areas where we have the best and most frequent data, which is the United States," he said in an interview. "I bet you that OPEC sees the lifting of the export ban ... as a very helpful component of their strategy."

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Even though the OPEC deal's eventual expiration will trigger a supply ramp-up, U.S. shale producers do not need to worry, since the agreement's participating countries have been mostly holding back medium and heavy grades of crude oil.

"We think there's going to be a pretty healthy appetite for U.S. light tight oil exports even after the deal ends," McNally said.

While American crude exports have triggered a more elastic supply curve, Medlock warned against calling the U.S. a swing producer akin to Saudi Arabia.

"If we talk about Saudi Arabia being a swing producer, typically that's the idea there's spare production capacity and they can ramp up or down depending on market signals," he said. "U.S. shale is nothing like that. Its movement up and down is largely driven by production capacity and commercial interests."

Filling the infrastructure gap

Even though physical bottlenecks are not likely to begin until U.S. maritime exports approach 3.2 MMbbl/d, the prospect that they could impose a ceiling on future exports has triggered new infrastructure investments, including ports looking to accommodate the world's largest oil tankers. Very Large Crude Carriers, or VLCCs, can each ship approximately 2 million barrels of oil but are too large to dock at most ports. Smaller ships such as Aframaxes usually load the product and then transfer it to VLCCs sitting further offshore.

"The only [port] that seems to be loading is Corpus Christi, which decided to do the dredging and allow for deepwater vessels," Ed Morse, global head of commodities at Citi Research, said in an interview.

The privately owned Louisiana Offshore Oil Port is the largest U.S. oil import hub, but when it starts exporting crude in 2018, the terminal will also be able to load VLCCs. For other ports that could not previously fit VLCCs for importing oil, the cost of adding those capabilities now for outflows is too high.

"You kind of need a public-private partnership," Morse said.

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Midstream energy companies continue to add other types of loading capacity through new projects. In a 50-50 joint venture with LBC Tank Terminals LLC, Magellan Midstream Partners LP is constructing a bidirectional pipeline to, and building another Aframax-friendly ship dock at, the Seabrook Logistics LLC facility in the Houston area. NuStar Energy LPNuStar Energy LP's third dock, which will be open to ships including Suezmax tankers, is expected to begin operating in mid-2018.

Pipeline developers, meanwhile, are racing to get a piece of the takeaway capacity pie. Magellan is gauging interest for a new crude oil and condensate pipeline from the Permian Basin and Eagle Ford Shale to destinations including the master limited partnership's own crude oil terminals, while Buckeye Partners LP's proposed South Texas Gateway project would deliver crude and condensate from Wink and Midland, Texas, to its Corpus Christi refining and export facilities. Enterprise Products Partners LP recently announced plans to convert a Permian Basin-to-Gulf Coast natural gas liquids pipeline to crude oil service.

At the end of the day, conversations about how to accommodate increasing U.S. crude exports are a far cry from the stigma that used to permeate policymaking in Washington, D.C.

"It was early 2013, and there was a report that one cargo of U.S. crude was sold to China. There was an uproar on [Capitol] Hill ... and the [U.S. Energy Information Administration] had to issue a special report stating that that was a re-exported cargo of crude, it was not U.S. production," McNally said. "That was how sensitive we were to exporting crude only four years ago. Boy have times changed."