What will US tight oil growth do to crude markets? The build-up in volumes early this decade led to a supply glut that undermined prices in 2014.
The next phase of growth, already well underway, will push volumes beyond the shores of the US – now possible since the 2015 repeal of the export ban. A wave of tight oil exports will disrupt crude markets over the next few years. Here’s what Alan Gelder, Head of Downstream Oils, and John Coleman, Senior Analyst, think are the big implications.
First, how much oil, and when?
We reckon the US will export 4 million b/d of light sweet crude (38-45 API) by 2022.
Technically, the US will then be the fourth biggest oil exporter in the world behind Saudi Arabia, Russia and Iraq.
But the US currently is one of the biggest net importers, buying in 7 million b/d to meet domestic demand. Net imports will dwindle to minimal levels through the next 10 years, assuming tight oil production doubles from 5 million b/d to 10 million b/d. We don’t expect the US to become a net exporter for the foreseeable future, but we expect significant two-way flows – imports and exports.
Big changes are happening to the crude mix feeding into US refiners that will lead to rising exports. Mexico and Venezuela, big suppliers of heavy crude into US Gulf Coast refineries, are both in steep decline. Mexico’s production of 3 million b/d at the start of this decade will have halved by early next; Venezuela is a similar story.
US refiners have turned instead to Canada’s growing volumes of heavy oil from oil sands, and where refinery configuration allows, processing lighter tight oil. But even allowing for capacity creep, US Refining Inc. isn’t set up for the scale of lighter volumes expected.
Most tight oil will need to find a home out in the global market. The US Gulf coast has sustainable capacity to support 2.8 million b/d of light, sweet crude exports; more will be needed if tight oil grows as we expect.
Second, who will buy US tight oil exports?
The good news: there will be a market for it – we forecast global demand to increase by 5 million b/d through the next few years. OPEC producers and others will compete for market share; but as the marginal supplier, we expect tight oil to capture the lion’s share of incremental growth.
The two big import markets are Europe, where demand is in decline, and Asia, which has strong demand growth.
European refiners traditionally buy from Russia (Urals, medium grade) and lighter crudes from the North Sea (Brent) and West Africa (Nigerian Bonny among others). Asian refiners are set up to process a heavier crude slate, and have longstanding relationships with the big Middle East producers.
We expect Europe to be the natural target for US light crude exports, displacing West African sellers who will, in turn, target Asia and compete with lighter Middle East grades. But it won’t be black or white – it’s a very liquid and dynamic market.
Crude cargoes can go anywhere, and as new kid on the block, US tight oil has no dependent relationships or loyalties. Asia’s where the growth is, and tight oil cargoes will find their way there from day one.
Third, rising tight oil volumes will have a lasting effect on crude price differentials.
Brent-WTI has averaged under US$3/bbl over the last three years; we expect it to be around US$6/bbl in the coming years. The WTI price is set inland at Cushing, Oklahoma.
The differential to Brent is made up of inland distribution costs and inter-pipeline competition to the Gulf Coast (US$4-5/bbl) and shipping whether to Europe or Asia (US$1 – 2/bbl). On the high seas, delivered WTI will price much the same as Brent; it’s the netback to upstream producers that could be US$6/bbl lower.
The oil market, used to volatility, used to disruption, will adjust to rising tight oil volumes.
Two big questions hang over the thesis: Will tight oil deliver on the ambitious growth targets? And if it does, will OPEC producers sit back and let US exports take market share in its traditional Asian market?
Source: Wood MackenziePrevious Next
Huge Opportunities For Investment in Maritime Sector: Nitin Gadkari
India Shipping and Offshore Summit