Wood Mackenzie: Will a shifting global market embrace U.S. crude?

3/5/2018

HOUSTON, EDINBURGH and SINGAPORE -- As tight-oil production continues to grow, the U.S. is positioning itself as a major player in the global crude market, claiming a place it last held more than a century ago. With onshore lower 48 output expected to exceed 11 MMbpd by 2023, the U.S. is poised to become the world’s largest oil producer. However, questions remain about where this future oil production will go and the impact U.S. volumes will have on global oil markets.

A new study by Wood Mackenzie, U.S. Crude Exports – Making Waves, examines this shift in the oil market, and assesses the challenges and opportunities facing the market and U.S. producers and midstream operators.

Ed Rawle, chief economist at Wood Mackenzie, said: "The global crude trade landscape continues to shift as the U.S. Lower 48 pumps more light sweet crude into the market. U.S. exports are forecast to approach 4 MMbpd by the mid-2020s, likely making the U.S. a top five global crude exporter, with similar export volumes to Iraq and Canada. However, with limited additional demand for these volumes in the domestic refining system, future U.S. production will need to clear into export markets."

Most of this new output will be light sweet and ultra light crudes, however, most U.S. refineries are configured to process medium and heavy crudes – in 2016, just 32% of the crude processed by U.S. refineries were light crudes. Without large-scale capital investment, the U.S. domestic market can only absorb about a quarter of the additional 4 MMbpd of U.S. crude expected to enter the market in 2023, leaving the rest for export.

"In the near term, the U.S. will look to Europe to absorb most of its crude volumes," Mr Rawle said. "U.S. crude oil refining values are higher in Europe and transport costs are lower compared to say, Asia. However, U.S. crude grades will be fighting African crudes for European market share, requiring discounts to stay competitive. Once European demand is sated, the marginal barrel will then shift to Asian markets in 2022, where higher transport costs will require even further discounts to capture market share."

U.S. crude producers with operations in the Permian basin could see higher values for their crude than peers  earning premium prices  over the next decade vs. Eagle Ford and Cushing blend crudes.  The Permian basin – the jewel in the U.S. Lower 48’s crown – is forecast to account for half of all U.S. onshore oil production by 2023, or approximately 5 MMbpd.

John Coleman, Wood Mackenzie’s Senior Analyst North American Crude Oil Markets, said: "Not all U.S. light crudes are created equal. Differences in quality suggest a strong appetite for Permian crude in Europe and Asia, where it may receive a premium of ~$0.50/bbl relative to WTI Cushing blend and Eagle Ford crude."

As U.S. producers and midstream operators assess their portfolios, questions about specific crude streams will arise as they assess which are most attractive to international buyers, and which export hub is best positioned to not only reach the right markets, but to handle the highest volumes.

"With additional Permian takeaway pipes headed for Corpus Christi, and potential for massive port infrastructure enhancements to accommodate larger crude vessels, Corpus Christi is best positioned to see significant volume increases. We forecast Corpus Christi will surpass 1 MMbpd of exports by 2020, doubling to 2 MMbpd by 2023," Mr Coleman added.

Growth in U.S. production is set to reshape the global oil market. Producers, midstream operators and investors who can capitalize on this transformation will be well positioned to thrive as the transformation gets under way.

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