As US shale production continues to ramp up, a dramatic migration of crude from west to east resumes and accelerates.
Barrels that are diverted away from the Western Hemisphere consist of two parts: backed-out imports and additional exports, with both rooted in large North American supply growth.
Thanks to this supply growth, coupled with the lifting of the US crude export ban and the slow expansion of pipeline capacity from Alberta, North America's crude exports can only increase, encouraging flows to other regions.
In 2016, exports of US crude increased 60,000 b/d to 525,000 b/d despite a decline in crude oil production. Exports, in fact, have been as high as 1 million b/d early this year.
On the other side, the shrinkage of US crude oil imports has been in existence for many years and will continue. In 2016, due to lower US crude production and narrowing price differentials, the nation imported 7.9 million b/d of crude, up 7.2% from the volumes imported in 2015. However, from a historical perspective, gross crude oil imports in 2016 were still 22% lower than their 2005 high of 10.1 million b/d.
Another fact that could further back out existing imports to the US would be the arrival of more Canadian crude to the US, once adequate pipeline capacity is built. These include expansion of the Trans Mountain pipeline and the construction of Keystone XL or Energy East.
Sarah A. Emerson, managing principal, ESAI Energy LLC, conducted a simple forward-looking calculation in her recent paper on crude migration.
"If we hold exports constant at 1 million b/d, then, given expected increases in US crude oil production, crude oil imports can easily fall by 2 million b/d by 2025," she said. "The combination of exports and avoided imports means as much as 3 million b/d of crude oil will flow away from the US."
She also noted that Latin American crude is an additional volume leaving the Western Hemisphere, heading east.
Given the proximity of refineries, the US will increase crude exports from Mexico. Mexico's energy reforms are set to attract foreign investment and lift production. However, the rest of Latin America may not fare so well.
"Latin American production will rise enough to increase the flow to Asia perhaps by as much as 600,000 b/d [by 2025], but is unlikely to target the amply-supplied US market," Emerson said.
In total, the combined volume of backed-out imports or additional exports from the Western Hemisphere could be 3.6-4 million b/d by 2025, Emerson estimates. Some very aggressive US production estimates hint at even bigger outgoing flows.
Targeting Asia
Barrels that are diverted away from the Western Hemisphere will head east, looking for a market in Asia.
China has been a bigger destination for US barrels, partly because the output cuts by other producers have possibly made an opening. According to data from the Energy Information Administration, US crude exports to China averaged 68,000 b/d over the recent 3 months since October 2016 compared with merely 1,000 b/d in 2015.
With US supply continuing to rise in the forecast, the marginal destination for US crude oil will continue to be the Asian market.
Now, with plentiful supplies of crude oil from North America, Latin America, Africa, and the former Soviet Union all looking to Asia, the obvious question is how much can be absorbed there and what happens to the traditional suppliers in the Persian Gulf?
"Asia's net crude imports can easily rise by 3 million b/d by 2025. With crude oil sources other than the [Persian] Gulf sending at least 2 million b/d, this leaves only 1 million b/d of Asian market share for the [Persian] Gulf producers," Emerson said, adding, "Over 10 years, this is quite a small volume of annual growth, underscoring greater competition for the Asian market, which will encourage even softer crude oil prices."
Conglin Xu | Managing Editor-Economics
Conglin Xu, Managing Editor-Economics, covers worldwide oil and gas market developments and macroeconomic factors, conducts analytical economic and financial research, generates estimates and forecasts, and compiles production and reserves statistics for Oil & Gas Journal. She joined OGJ in 2012 as Senior Economics Editor.
Xu holds a PhD in International Economics from the University of California at Santa Cruz. She was a Short-term Consultant at the World Bank and Summer Intern at the International Monetary Fund.