New York — The development of a more transparent market for growing US crude exports into Europe took a further step forward this week with the first ever trade of a delivered WTI Midland cargo in the Platts Market on Close assessment process.
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On Tuesday, BP lifted an offer from Permian producer Occidental Petroleum for 700,000 barrels of WTI Midland cargo at a 60 cents/b premium to Dated Brent in the Platts Market on Close assessment process.
The offer was the first time that Occidental Petroleum has offered in the Platts MOC, although BP was a regular bidder in the process during the first quarter of 2019.
On July 1, 2019, Platts started reflecting pipeline provenance in its DAP Europe WTI Midland assessment. The assessment reflects crude supplied via the BridgeTex, Cactus, Longhorn or Midland-ECHO pipelines.
Market participants in Europe Wednesday pointed to growing arrivals of US crude over the summer, citing a highly competitive environment with a swarm of discounted barrels from the Mediterranean and West Africa.
Sources talked of a "push arbitrage" from the US Gulf Coast, arguing that Europe is not short of deeply discounted crudes.
"Europe is certainly not pulling," a trader said. "[It] is very much [the] US pushing."
With US light sweet crude production growing, and exceeding US refinery demand for those barrels, and export capacity increasing, the international market is the only outlet for excess US barrels.
In recent weeks, Europe has taken about one-third of US crude exports compared with just under half of US crudes going to Asia.
S&P Global Platts cFlow data shows an estimated 7.1 million barrels of US crude heading to Europe the week ending June 28. That's down slightly from 8.17 million barrels the week ending June 14, but would put total June crude exports to Europe at roughly 28 million barrels, up from the roughly 16.3 million barrels in June 2018 reported in US Energy Information Administration data.
However, with an abundance of discounted Mediterranean and West African crudes, some traders expected the flow from the US to slow down.
"Hard to see the US arbitrage to Europe working so well now for August loaders given the weaker CPC [Blend], weaker Dated [Brent], and weaker [West Africa], etc." a second trader said, adding that the European market called for cheaper US crude.
"The US continues to price down to the level it takes to work into Europe, right now it feels very much like it's still searching for homes so despite Europe not needing it or wanting it, I think it's still going to come," the first trader said.
US CRUDE ADVANTAGES
US crudes have done well in Europe, largely because of advantaged pricing.
WTI Midland has set the floor for the DAP (delivered at place) Rotterdam market since Platts began publishing values for the grade back in September 2018.
Most recently, WTI Midland DAP Rotterdam discounts to rivals like Forties and Ekofisk have averaged $1.19/b and $1.37/b, respectively, over June.
US crudes like WTI also represent a great deal for European refiners in terms of refined product yields.
Platts data shows that WTI offers a European refiner better product yields than Forties, but worse yields than Ekofisk in the ARA or Azeri Light in the Mediterranean. Despite that, WTI continues to pour into both regions, as deep price discounts bolster refining margins.
Light Houston Sweet cracking margins in the ARA have outpaced cracking margins for Azeri Light, Ekofisk and Forties since April, Platts data shows.
There is only so much Ekofisk and Azeri Light to go around, and WTI has stepped in to fill a large gap left by suppliers like Iran and Libya, not to mention Urals most recently following contamination issues with that crude on Russia's key Druzhba pipeline.
US CRUDE PRODUCTION RISING
US crude production for the first time averaged over 12 million b/d in April, with over one third of that production coming from the Permian basin.
Furthermore, S&P Global Platts Analytics forecasts Permian production to reach 5 million b/d by Q1 2020, a level that would outstrip the current Permian pipeline takeaway capacity of around 4 million b/d.
A collection of three new crude pipelines, including the EPIC interim crude line, are expected to start up between now and the end of the year. Together, the lines will have capacity to move an additional 2 million b/d of crude from the Permian Basin to the Gulf Coast.
Linefill on the 400,000 b/d EPIC line was expected to begin in late June, with anticipated startup in July. EPIC will move crude from the Permian Basin to Corpus, Christi, Texas.
Plains All American's 670,000 b/d Cactus 2 pipeline also will move crude from the Permian to Corpus Christi. Linefill has begun on Cactus 2 and market sources expect the pipeline to be operational starting in August.
Phillips 66's Gray Oak, with connections to Corpus Christi, Sweeny and Houston is set to start in October, according to sources.
"More pipelines coming on means more supply gets to the Gulf Coast with nowhere to go," a broker said.
As more Permian crude reaches the Gulf Coast, there will be a growing need to increase storage and export infrastructure. Currently, 22 facilities across three Gulf Coast states have the ability to export nearly 6 million b/d, according the Platts data, and there are more projects in the works to meet growing demand.
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