Challenges facing US crude
At the close of the week ending Aug. 31, 2018, oil prices strengthened for the second consecutive week, after falling to a four-month low. Brent crude rose to $77.64 per barrel, which is the highest level since mid-July. WTI rose to $69.8 per barrel, but still lags below $70. Oil prices increased amid strong demand and shrinking inventories.
Since late April 2018, while global markets wait for the reimposition of US sanctions on Iran on Nov. 4, Brent crude has been moving between $72 and $78 per barrel. Tightness in the market might bolster oil prices through the year end, with no end to demand in sight and production collapsing in Venezuela.
The latest weekly US Energy Information Administration (EIA) data represented a significant improvement, which implies a bullish oil market. This is despite increased production in US shale oil which is trapped throughout Texas and Oklahoma due to pipeline capacity issues. Additionally, US oil export facilities remain limited due to port infrastructure that maxes out at about 3 million barrels per day.
The more the Brent/WTI spread widens, the more competitive US crude becomes.
In order to maximize freight for long-haul tankers, most Asian refiners usually load their crude oil imports in very large crude carriers (VLCCs), which can each carry up to 2 million barrels of crude oil. However, bottlenecks arise once US exports rise above 3 to 4 million barrels per day. Loading capacity for VLCCs is possible only at the Louisiana Offshore Oil Port (Loop), the only US deep-water port. Outside the Loop, VLCCs can load to nearly 80 percent capacity in Corpus Christi and then fill to capacity via reverse lightering from smaller vessels. Offshore Corpus Christi, VLCCs load entirely through this process, which is costly and time consuming.
There are other challenges to growing US crude exports, not least moving incremental volumes from well to port. And even once the logistical hurdles are cleared, US crude is a mismatch for the configuration of many refineries worldwide. This means it will have to be priced lower to sell. All these issues noted for US oil are leading to the growing WTI discount to Brent, which reached $7.84 per barrel at the week’s closing. The more the Brent/WTI spread widens, the more competitive US crude becomes.
- Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza