March 4, 2022 [Energy Intelligence] – Several factors suggest the time is ripe for a surge in US crude exports, but volumes have not changed much so far.
Global benchmark Brent crude is trading some $4.50 above US marker West Texas Intermediate (WTI), which is priced in Cushing, Oklahoma, which well exceeds the cost of transport from Cushing to export terminals along the US Gulf Coast. The US downstream is also in heavy maintenance and flows of Russian petroleum to Europe are under threat.
And yet, according to ship brokers and tanker trackers, US crude exports have not jumped.
One major reason is that physical crude flows from Russia seem to be holding up for now.
Market players said the disparity between a wide Brent-WTI spread on the one hand and flat US crude exports on the other reflects a familiar dynamic — namely, that Cushing is constrained and to a large degree divorced from global markets at a physical level.
“Even if demand comes from overseas, the capacity out of Cushing is set [by the Seaway and Marketlink pipelines to the US Gulf Coast],” one Texas-based broker told Oil Daily, adding that he had virtually never seen either pipeline operating at less than the high 90% capacity.
That means that even though a potential disruption to Russian crude flows to Europe has helped widen the Brent-WTI differential, “Cushing can’t be responsive,” the broker said. That in turn widens the spread further.
In addition, several experts noted, inventories at Cushing are close to their minimum operating levels — realistically, very few barrels can leave the hub.
The Houston WTI price assessment is more relevant to export economics, the broker said, echoing statements from several analysts and other market players. Activity in the Houston futures market has picked up recently, but traders say the hub remains geared toward physical oil trade.
“If you look at the prices along the US Gulf Coast, those spreads didn’t widen like Cushing did,” said Andy Lipow of Houston’s Lipow Oil Associates.
Differentials did move, but not at the scale of Cushing WTI’s discount.
The structure of oil’s forward curve plays a role as well. WTI futures are in steep backwardation, with April trading some $2.10 above May and $4.50 above June.
Because Houston is so physical, and because the forward curve is in such steep backwardation, players in that market tend to sell what they have very quickly — they don’t build inventory, as doing so is a money-losing proposition.
“The sellers at Houston have sold their barrels 100%. They haven’t rolled,” the broker said.
In short, the barrels are already spoken for.
That’s not to say that US crude exports have no role to play in offsetting potential disruptions to Russian flows. But rather than a dramatic, structural surge, experts say such a development would mark a rearrangement of flows.
“Should the West ban Russian oil sales in Europe, which is highly unlikely, Russia would certainly seek to sell more oil into China by discounting the price,” Lipow said. “That would result in China buying less oil from other suppliers and that oil could be redirected to Europe.”
The same dynamic applies should Russia decide to cut off supplies to Europe.
The Asia-Pacific is the largest foreign regional consumer of US crude exports, and thus US flows there, displaced by cheap Russian barrels, would instead flow to Europe.
In addition, the US is mulling a major release of oil stocks from its strategic petroleum reserve. Market players said they expect the vast majority of any such release to be snatched up by overseas buyers rather than US refiners.
Some market watchers see March as a strong month for US crude exports. Tanker-tracking firm Kpler’s current outlook sees March crude and condensate exports close to February’s levels.
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