Is the US Tight Oil Market 'Too Robust to Bust'?

York: Wood Mackenzie expects there to be continued debate on the crude oil export policy in 2014, but maintain our reference case assumption that the current policy remains in place.

Wood Mackenzie does not think the lifting of the ban would have an impact on the Brent price because the global supply/demand balance for oil would remain the same in any case. An easing of U.S. crude oil export restrictions could change the trade flows of crude oil, but not total supply. We would expect an impact on crude oil price differentials in conjunction with these changing trade flows. There could be some narrowing of Brent-WTI, but the magnitude of the narrowing could be a function of which barrels would be exported. One hypothesis is that Eagle Ford versus Bakken barrels could have a different impact on differentials due to their quality differences.

Any narrowing of differentials between U.S. produced and internationally priced crude would benefit U.S. producers, but U.S. refiners would still be better off relative to the rest of the world. If the quality of the crude oil export barrel impacts the degree of narrowing, that might lead to some producers benefiting more than others. Producers in the play that exports the barrel could see wellhead realizations rise more than the differential narrows as a whole.

Rigzone: What are the major variables that could undermine your basic assertion that U.S. LTO is "too robust to bust"?

York: The two big risks to LTO would be a global drop in oil prices or a significantly widening of price differentials between the global price (e.g., Brent) and U.S. inland crude prices (e.g., WTI). However, we do not foresee either of these risks materially impacting the wellhead economics of LTO.

The combination of growing oil demand and the market needing non-tight oil with higher break-evens than LTO combining to keep global oil prices high enough to keep LTO opportunities attractive. Certainly there will be volatility around oil prices, but producers have the ability to mitigate that impact through hedging. Brent-WTI (which proxies the discount of U.S. inland crude prices to its global refining value) is expected to be wide enough to support rail movements to North America's east and west coasts. However, we also expect the differential to remain narrow enough to not threaten tight oil wellhead economics.


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