US Crude Exports Face Mounting Challenges

Crude exports from the US are clawing back ground lost during the Covid-19 pandemic, but they remain under pressure. Data from the US Energy Information Administration (EIA) show crude shipments lagged year on year throughout the first quarter of 2021. Meanwhile, data from tracking firm Kpler indicate year-to-year growth in April, but May and June are trailing behind 2020 levels. Kpler puts total first-half 2021 crude exports at roughly 2.6 million barrels per day, compared to 2.8 million b/d in 2020. The EIA’s figures are generally higher, but the same trend is evident. Several factors pose challenges for US crude exports, including shifting demand patterns, the return of some Opec barrels to market and pure economics. The spread between global benchmark Brent crude and US marker West Texas Intermediate (WTI) is compressed, making shipments abroad a tough proposition (OD Jun.11'21). But producers in the world’s largest economy need foreign markets as domestic downstream capacity dwindles (OD Mar.30'21). In addition, demand growth is focused in the Asia-Pacific region, not the Atlantic Basin in general or North America in particular. Gradations The bulk of US crude exports continue to consist of light, sweet crude. But inland grades such as Bakken have seen a swift and dramatic decline -- Bakken exports have fallen by almost 110,000 b/d from 2020 to just 10,000 b/d so far this year. Exports of heavier grades such as Mars and Southern Green Canyon have held up better as Opec-plus output quotas keep a lid on supply of look-alikes, but as the bloc lifts restrictions there will be more barrels available. Meanwhile, re-exports of Canadian crude hit some 100,000 b/d first half of 2021, benefiting from the opportunity the Opec-plus cuts provided (OD Jan.21'21). Eastern Exposure According to Kpler, the Asia-Pacific region is the largest market for US crude suppliers. At least 49% of US crude exports went to countries in Asia during the first half of the year, with India, South Korea and China the top three regional destinations. Asia will likely be the focus of incremental US crude exports. According to experts, including those at Turner, Mason and Co., the bulk of new refining capacity is being built there as North America and Europe cut downstream capacity amid the accelerating energy transition. However, accessing Asian markets could become more difficult, especially as Opec-plus opens the taps. That’s because refineries are built with an eye toward the most efficient crude sourcing for the regional market, according to Turner Mason’s John Auers. And the new refineries in Asia will mostly be configured to take closer, cheaper Middle East crude. Back at the Ranch In the immediate term, crude exports from the US face hurdles in the form of a compressed Brent-WTI spread. Currently, the headline differential is some $2. The spread between Brent and WTI at Houston and Midland, Texas -- the two assessments most relevant to would-be exporters -- is even thinner. WTI is drawing support from lower domestic crude production and a gradual recovery in refinery utilization. The most recent EIA weekly reports put downstream utilization at over 90% so far in June, its highest since the pandemic hit US shores over a year ago. Meanwhile, upstream players are remaining cautious -- domestic crude production is at about 11.1 million b/d, only slightly higher than in June 2020 but almost 1 million b/d lower than the same month of 2019. Some experts have expressed skepticism that output will ever recover to its pre-pandemic peak (OD Jun.4'21). Demand and refinery utilization, meanwhile, have not recovered as much in some key export markets such as Europe. Frans Koster, New York