Wednesday, 08/17/2022 Published by: David Braziel
Yesterday’s Weekly Petroleum Status Report from the Energy Information Administration included an eye-popping statistic: 5 million barrels a day of crude oil were exported from the U.S. in the week ended August 12. It’s the highest U.S. export volume ever reported — and by a margin of nearly half a million barrels a day! But as huge as that top-line number is, and as many headlines as it’s sure to grab, it's not unexpected. Major changes in international crude markets, coupled with tectonic shifts in North American upstream and midstream, have conspired to push U.S. exports higher and higher. In today’s RBN blog, we examine the factors leading up to this point and what it means for crude markets in the U.S. and abroad.
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We’ll start by tempering the news somewhat. As significant as 5 MMb/d is, it's important to note that the prior week’s reported exports were an underwhelming 2.1 MMb/d. As shown by the blue line in Figure 1, below, the crude oil export figures reported by the EIA tend to bounce around a lot from week to week — some weeks Very Large Crude Carriers (VLCCs) and other vessels might be counted just before or after the weekly cutoff time. An additional variable that ought to be considered when looking at the weekly figures is what the EIA calls “unaccounted for” crude volumes in their weekly statistics that balance out the difference between supply, demand and inventory change (see One Piece At A Time for how that math works). So looking at a four-week moving average (green line) gives a much clearer sense of how exports have been trending — so far this summer they've averaged around 3.4 MMb/d, their highest level since just before COVID hit in early 2020.
Figure 1. U.S. Exports of Crude Oil — Weekly and Moving Average. Source: EIA
Figure 2 provides a little more detail about what’s going on recently, with volumes broken out by exporting region. These are numbers based on our ship tracking model, which we detail each week in our Crude Voyager report. Because the data is based on ship departures from export terminals, the numbers do not match up with EIA stats on a weekly basis, but they usually do so over time. So according to these numbers, the volumes out of Corpus Christi have averaged a little over 2 MMb/d this summer (green bar segments), while the Houston region as averaged 800 Mb/d (blue segments) with the remainder coming out of Louisiana (320 Mb/d, purple segments) and Beaumont/Port Arthur (110 Mb/d, yellow segments).
Figure 2. Weekly Gulf Coast Crude Exports by Region. Source: RBN Crude Voyager
Make no mistake, average crude exports of 3.4 MMb/d is nonetheless a ponderously large volume that would have been hard to imagine as recently as 2015, when most crude exports to countries other than Canada were still banned. In a blog we did at the time (Imagine), we said that lifting the crude export ban would result in crude distribution operating more efficiently since surplus crude could simply be exported and refiners could process the crudes they preferred based on quality rather than wrestling with grades they were not best configured to handle.
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As it turns out, the efficient movement of crude oil to the refineries best optimized to run it, domestically and overseas, is still a key consideration in today’s market, six and a half years after the export ban was lifted. We put out a blog at the beginning of 2022 titled Every Little Thing that considered the combined impact of crude pipeline modifications and refinery closures and how they would affect Gulf Coast export markets. The main points were that the combined impact of the completion of the Enbridge Line 3 Replacement Project, the expansion of the Dakota Access Pipeline (DAPL), the reversal of the Capline pipeline, and the start-up and expansion of Energy Transfer’s Cushing South pipeline project would combine to make a lot more Canadian, Midcon, and Rockies crude available in Louisiana and the Beaumont/Port Arthur region. At the same time, refinery closures, particularly the Shell Convent and the Phillips 66 Alliance refineries in Louisiana (where the now-southbound Capline terminates), would mean less capacity available to process that crude. That was a recipe for higher exports, so we followed up by assessing the potential growth in U.S. exports — based on crude quality that domestic refineries could efficiently run — and the capacity for Gulf Coast terminals to handle increased export volumes. The upshot there was that we forecast exports to grow to 3.2 MMb/d in 2022 and up to 4.4 MMb/d in 2027 and that with a total estimated Gulf Coast export capacity of ~6.5 MMb/d, there was little danger of testing the limit. In hindsight that export forecast is starting to look a bit conservative but, in our defense, there have been a couple of very big things that have exacerbated the situation.
For one, Russia’s war against Ukraine and the resulting sanctions on Russian crude drove up prices. The higher prices incentivized producers in the U.S. and Canada to grow production back to 12 MMb/d (blue layer in Figure 3) and a little less than 5 MMb/d (red layer), respectively — despite producer hesitancy and upstream headwinds — albeit not nearly as quickly as many might prefer. Together, that’s about 840 Mb/d more North American crude oil production this summer than last.
Figure 3. U.S. and Canadian Crude Production. Sources: EIA, RBN
Another big slug of crude has come from the U.S. Strategic Petroleum Reserve (SPR). We wrote about the details of the planned release when it was announced in March in I Want to Break Free. As a result, the average net release from the SPR this summer has been 850 Mb/d of mostly medium sour crude hitting the Gulf Coast market (compared to about 70 Mb/d of crude released from the SPR in the summer of 2021).
And crude-oil quality matters here because Gulf Coast refiners are designed to efficiently handle sour crudes like most of what has been released from the SPR and increasingly shipped down from Canada. That’s in contrast to refineries in some parts of the world, where less complex refineries need an increasing proportion of sweet, low-sulfur crude — like what is commonly produced in U.S. shale plays — to meet IMO 2020 standards. What’s more, even for places that have refineries with desulfurization capabilities, high natural gas prices (like in Europe, for example) can make desulfurization uneconomic. Put another way, the quality of the incremental crude either produced here or in Canada or released from the SPR will impact how much gets run in North American refineries and how much will be pushed into overseas export markets.
Of course, the quality of crude available for export, and thus the attractiveness of it in various destination markets, will be at least somewhat (and in many cases very) different for each exporting terminal. Producing basins, and plays within those basins, have differing production profiles. Further, they have differing access to storage with blending capabilities, to pipelines with batching capabilities, to Gulf Coast regions with refining and terminaling options, and to export terminals with loading capabilities. So, which regions and terminals see increased export volumes will depend on which basins see volume growth and which midstreamers win throughput.
We’ve discussed some success stories this year, like in our recent blog about the EPIC Crude Pipeline out of the Permian nearing its capacity. But we’ve also noted that some Gulf Coast markets have struggled with the quality (or at least the perception of quality) that can be offered to international customers (mercaptans and iron and sulfur, oh my!). All of which ultimately is manifest in the prices marketers get for the crude — which is why we’ve seen, for example, crude oil out of Corpus Christi trading at a premium over Houston for much of the year.
As a result of sanctions against Russian crude, we’ve already seen the major focus of U.S. crude tanker exports shift this year. Figure 4 below breaks down the destination markets of U.S. crude oil during the first six months of 2022 into four color-coded categories: blue/green for Asia, purple for Europe, yellow for Latin America, and orange for North America. As you can see, there was a notable shift from primarily Asia-bound volumes last winter (blue/green-shaded bar to far left) to primarily Europe-bound volumes (purple-shaded bars) this spring and summer.
Figure 4. U.S. Crude Shipments by Destination in 2022. Source: RBN Crude Voyager
Canadian and U.S. crude production looks poised to keep growing. And with that growth, as long as politicians don’t do anything crazy, we have the ability to not only blunt Putin’s energy weapon, but to continue helping the cogs of the global economy to turn.
U.S. crude exports and the upstream and midstream dynamics that shape them will be a central theme at RBN’s upcoming xPortCon 2022. The conference will feature keynotes from Scott Sheffield, CEO of Pioneer Natural Resources; Steve Kean, CEO of Kinder Morgan; and Jim Teague, co-CEO of Enterprise Products Partners. We’ll also be sitting down with panels of experts like Brian Freed, CEO of EPIC, and Bo McCall, CEO of Moda Midstream, to discuss what they see coming up in crude oil export markets. To see the brochure and agenda, click here.
“Change the World” was written by Tommy Sims, Gordon Kennedy and Wayne Kirkpatrick. It was originally recorded by Wynonna Judd and a cover version was recorded by Eric Clapton for the soundtrack of the 1996 film Phenomenon. The track was produced by R&B record producer Kenneth Edmonds (a.k.a. Babyface). Clapton’s version of the song has been featured on over 20 releases, including extended plays and various artists compilation albums, and reached the Top 40 charts in 20 countries, including #1 on the U.S. Billboard Adult Contemporary and Adult Top 40 charts. The single won eight awards, including three Grammy Awards in 1997.
The Phenomenon soundtrack features various artists who contributed to the music score of the 1996 American romantic fantasy drama film starring John Travolta. In addition to Eric Clapton, the soundtrack features performances by Bryan Ferry, Jewel, Marvin Gaye and Peter Gabriel. The album topped the Billboard 200 Albums chart and sold more than 1.5 million copies. It was certified Platinum by the Recording Industry Association of America. “Everyday Is A Winding Road,” from Sheryl Crow’s 1996 self-titled album, was featured in the film, but was not on the soundtrack.
Eric Clapton is an English rock and blues guitarist, singer, and songwriter. He is regarded as one of the most successful and influential guitarists in rock music. Clapton is ranked #2 in Rolling Stone’s “100 Greatest Guitarists of All Time,” #4 in Gibson’s “Top 50 Guitarists of All Time,” and #5 in Time magazine's list of “The 10 Best Electric Guitar Players.” He continues to record and tour.
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