Crude exports for the week ended May 25 were reported to be 2.2 million b/d, a 67% increase vs. a year ago, according to the US Energy Information Administration. Crude exports cumulative average of 1.712 million b/d for the same period jumped a staggering 117.6% compared with last year.
The rising crude export volumes are due in part to the lifting of the 1970’s restriction on crude exports. Congress dismissed the constraints 18 months ago in December 2015. This 50-year-old restriction was put in place during the 1970s energy crisis to protect US energy security. Though after the ban was lifted that first year, there were minimal increases in world markets for US supplies. In December 2017 demand rose and export volumes doubled. Growth continued throughout this year’s first quarter, and for the second week of May, weekly crude exports hit a record of 2.6 million b/d.
Key components
The rise of crude prices and US production have assisted US exports, stimulated by production constraints by members of the Organization of Petroleum Exporting Countries. When OPEC members and non-OPEC producers agreed to lower production effective January 2017, constricted world crude supplies enabled a market for US shippers. According to Morningstar Inc., “producers chose to cut cheaper heavy sour crudes over lighter, more expensive grades, leading to a shortage of heavy sour crude in Asian markets where OPEC producers rationed these crude grades.” It said, “The result was an increase in prices for heavy crude in Asia, including the regional benchmark Dubai grade.” Thus, opening a window for US offshore Gulf of Mexico medium sour crudes to be dispatched to Asia.
With the OPEC production constraints, shipments of US sour crudes were received in Asia and had an influence on crude market prices during 2017. Before the OPEC deal, the markets for Brent and West Texas Intermediate were in a strong contango, which is when the crude price is higher in the future than in the present. Producers have more incentive to store the crude for future sale, creating an excess supply. Now the market is switching toward a backwardation phase, when current prices are higher than what the future prices might be, thus shrinking storage and tightening supply.
Prices for crude oil rose during second-half 2017. During the summer of 2017, US refinery throughput rose and the narrowing of world supplies because of the OPEC agreement led to much higher prices. WTI crude transported at Cushing rose 42% from the low in June 2017 to $60/bbl by yearend 2017. Brent, the North Sea benchmark, rose 49% from $45/bbl to $67/bbl by the end of December. A wider Brent premium to WTI encourages buyers from Asia and Europe to ship the lighter shale crude overseas.
Shale production
Concurrent with the rise in prices of the last half of 2017, new drilling stimulated US shale production. During the last half of 2017, production rose by 935,000 b/d in just 6 months. According to EIA, 855,000 b/d of the production increase came from the West Texas Permian shale basin. Crude output has increased more than 2 million b/d since September 2016 when production was at 8.6 million b/d due to the 2014 price crash. The rise in production corresponds with the barrel-for-barrel increase in crude exports.
The US continues to import medium to heavy crude to feed refineries that aren’t equipped to handle the lighter shale, economically making the new shale production better to export.
Prior to the deregulation on exports, Canada received 92% of the total amount exported during 2015. After the first year of deregulation, 19% of crude exports went to Europe, Africa, and the Middle East and only 9% went to Asia. During 2017, US crude exports of Canada’s share fell to 29% from 60%.
