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Platts: Tricky timing for US' renewed crude oil exports

By Digital Look

Date: Tuesday 08 Mar 2016

Platts: Tricky timing for US' renewed crude oil exports

(ShareCast News) - By Dave Ernsberger, global director of oil at Platts
Timing is the biggest question mark surrounding the US' decision to lift a four-decade old restriction on crude oil exports, as energy economics and geopolitics spawn an oil glut that has depressed prices to a 12-year low. Washington lawmakers' surprise move - in December last year - enables US oil producers to lock in supply contracts with foreign clients without restrictions for the first time since the Arab oil embargoes in the 1970s.

A legal green light that allows the US to ramp up its crude exports has global ramifications. The US, which produces 9.22 million barrels a day (bpd) of oil, will likely jostle with Saudi Arabia and Iran, the vying energy hegemons in the Middle East, for European and Asian market share over the coming five years. Iran's appetite to regain market share has intensified following the lifting of sanctions on 17 January and Saudi Arabia is safeguarding its markets to protect the Kingdom's strained budget against low oil prices and the rising expense of the war in Yemen.

OPEC's strategy, spearheaded by linchpin Saudi Arabia, to push the US' shale oil companies and other high-cost producers out of the market, is working after fifteen months of fiscal pain and sweeping job cuts. US production is likely to slide to 8.3m bpd by late-2016 as producers crumble under burgeoning debt piles - $30/bbl is proving too painful. Oil could already slide as low as $20/bbl if Iran brings the 500,000 bpd it has promised online this year, according to the International Monetary Fund.

The Achilles heel of OPEC, a cartel characterised by internal bickering, is underestimating the power of shale oil on global oil dynamics and the US has often demonstrated the ability to surprise. The country's oil output has climbed nearly 50% from 2011 and around 4mn bpd of additional output from 5,000 drilled wells is waiting in the wings for when and if oil prices rise above $50/bbl.

Speculation that the US is eyeing European market share rang true when the country's first crude export arrived at the French port of Marseille on January 20, just three weeks after the ban was lifted. Fresh competition from the US may calm Russia's tempestuous relationship with its European clients, with the latter frequently threatening and failing to diversify its supplier base.

Meanwhile, African exporters have begun turning away from US shores - Nigeria, Algeria and Angola, primarily - to focus on the regional demand that is being fuelled by Africa's booming middle class population and industrial growth. Still, West African exporters will continue to supply the US' east coast to a degree as with current shipping rates, it is cheaper than transporting domestic crude across the continental US.

While there were restrictions on crude exports, US refiners were free to supply millions of barrels per day of refined products such as diesel, gasoline, LPG and lightly treated condensates to customers abroad for several years, plus 500,000 bpd of crude oil that is mostly destined for Canada. Combined, the US already exports more than most non-OPEC nations.

But this does not mean that the country's relatively embryonic export market has the leverage to eat into Iran, Saudi Arabia or Russia's market share for a while, even though Switzerland, Spain, Italy, France and Turkey have expressed interest. Feeding Italy's demand could provide a small boost to the US' entry into Europe, as the Libyan barrels that typically supply Italy have been derailed by civil war.

The US' unpredictable mix of blends may also scare off Asian customers for now, as many prefer knowing the specifics of the import blend. A company could make, or equally lose, millions depending on the batch that is delivered. The more exploratory South Korean refiners may import test batches, while China and the bulk of the region wait to see how European importers fare. Iran will try to snatch up some of China's import appetite, leveraging the rejuvenation of the historic Sino-Iran trade link and the countries' newly signed 10-year deal that increases trade to $600bn.

The US' export ambitions mark a transformational chapter for the West Texas Intermediate (WTI) benchmark, which has largely been driven into the wilderness over the last decade as it only served US oil refiners with access to US crude. Now, the spread between the WTI and Brent oil price - the benchmark outside of the US - is set to narrow, eroding the discounts that US refiners have long enjoyed.

It must be noted that the lifting of export restrictions can be reversed in three years, and export licensing requirements can be introduced for up to a year under certain conditions such as national emergencies, sanctions, supply shortages, or an elongated period of high domestic oil prices. Setting such political uncertainty aside, US exporters look set to slowly carve out market share over the coming years and become an invaluable spoke in the country's economic wheel.


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