Narrow Spreads Could Hamper US Crude Exports

Crude differentials in the US suggest a tough outlook for would-be exporters. The headline spread between global benchmark Brent and US counterpart West Texas Intermediate (WTI) priced at Cushing, Oklahoma, hovers around $2.25. That spread is well below the $3 to $3.50 level many experts have identified as necessary to justify shipping crude from Cushing to ports along the Gulf Coast for export. “Narrowing of the [arbitrage] is generally not good for US exports and increases US imports,” noted Robert Yawger, director of energy futures with Mizuho USA. The spread tightens as one approaches Houston, the main locus for US crude exports. WTI-priced Midland and Houston trades even closer to Brent. A thinner discount to Brent makes exporting crude less economically feasible. Currently, the US exports some 2.9 million barrels per day of crude, down from 3.7 million b/d at the February 2020 peak. The tightening spreads reflect both acute and structural developments on multiple fronts and pose challenges up the supply chain. That’s because even before the Covid-19 pandemic, the US downstream faced an oversupply of domestically produced light, sweet crude. Now, with over 1 million barrels per day in refining capacity off line in the US, domestic producers need foreign markets to accommodate incremental production, but the economics are working against them (OD May27'21). Divergence One major factor informing the strength of the WTI complex is the US’ swift recovery from the Covid-19 pandemic relative to other countries. An aggressive vaccine rollout and major stimulus measures have helped loosen quarantine measures and put cash in people’s pockets, bolstering domestic fuel consumption. To wit, refiners are opening the throttle. Data from the Energy Information Administration show the US downstream averaged utilization of 91.3% the week ended Jun. 4, the highest levels since before the pandemic reached its shores. As refiners raise throughputs, they consume more crude, raising regional prices and eating into volumes available for export. Meanwhile, major swaths of the rest of the world remain under some level of lockdown, hampering both demand and downstream utilization elsewhere, lowering demand for crude. Supply Side Rising oil prices have not translated to a huge jump in US oil production, however. Current volumes are some 2 million b/d lower than their peak at about 13 million b/d in November 2019, and some experts have expressed deep skepticism that output will ever return to its pre-pandemic highs (OD Jun.7'21). Meanwhile, the Permian Basin and Eagle Ford face surplus pipeline takeaway capacity (OD Jan.11'21). This further bolsters WTI prices as it means midstream players must compete for barrels, rather than producers competing for pipeline space. As the international benchmark, Brent tends to be more vulnerable to geopolitical events and global supply trends, and there are potential headwinds to prices on both fronts. Opec-plus is increasing supply, which constitutes a one-two punch to Brent and to light, sweet crude in general. On the one hand, as Opec and its allies open the taps, global supply rises. On the other, Opec-plus is likely to raise production of medium and heavy grades first. This should help widen the discount of such grades against lighter fare, which in turn will entice complex refiners to run more of the cheaper heavy grades. Frans Koster, New York