US Crude Oil Exports Continue to Grow
U.S. crude oil exports have soared due to a combination of:
- rising domestic crude oil production
- high but flat domestic demand
- a law change in December 2015 that allowed sales beyond just neighbor Canada
Since the shale revolution started in 2008, U.S. crude production has increased almost 125 percent to around 11.2 million barrels per day (MMbpd). Yet, this light, tight oil boom has not been a great match for the massive 18.6 MMbpd U.S. refining system. U.S. refineries are generally configured to process the heavier crudes imported from longtime suppliers Canada, Mexico and Venezuela.
So today, 65 percent of U.S. crude oil production has a very high 40 degree API gravity or above. This has left huge amounts of surplus shale oil available for export. This mismatch between what the U.S. is producing and what it is typically built to process also explains why the country still imports a significant amount of oil, taking in an average of 8 MMbpd in late 2018.
Since January 2018, higher prices have helped increase U.S. crude production nearly 20 percent. U.S. crude exports therefore more than doubled year-over-year to average 1.9 MMbpd in 2018. The rise in production, augmented by takeaway constraints in West Texas that have depressed local prices, has offered a key advantage for U.S. exporters by keeping WTI prices in check. In contrast, mounting global demand and geopolitical concerns (e.g., U.S. sanctions returning to Iran) have pressured Brent, the international benchmark, to the upside.
Rising from nothing prior to 2016 to 510,000 bpd in June 2018, China has accounted for 20 percent of U.S. crude exports in recent years. But a U.S-China trade war that officially kicked off that very month has China implementing a 25 percent tariff on U.S. crude. By August, purchases from the U.S. had dropped to zero.
For China, similar quality West African oil is a practical replacement for American crude. But for the United States, an alternative market for China is a much harder find. India could help but its oil market is just a third the size of China’s, and India has bought just 10 percent of the U.S. crude that China has.
Looking forward, if China continues to reduce purchases from the United States, it would increasingly put downward pressure on WTI and help extend the discount to Brent. In any event, EIA models a $3 to $5 premium for Brent for years to come, a large enough gap where U.S. exporters can still make money. With flat demand freeing up even more for export, the U.S. DOI now reports that domestic crude production could surge to 14 MMbpd by 2020.
The U.S. Gulf Coast ports, however, need to be expanded and deepened to fully load the Very Large Crude Carriers (VLCC), some of which can hold over 3 MMbpd. Currently, there is just one port in the region that can carry a VLCC holding 2 MMbpd. Overall, U.S. crude exports could reach 5 MMbpd over the next five years.
U.S. policy wise, American consumers should realize that the capacity to export is a good thing. Exports encourage more production in times of flat demand to keep our own prices low. Without the export option, many in the U.S. oil industry could be forced out, and imports would play a larger role. And if more electric cars could eventually lower U.S. oil demand in a significant way, even more crude would be allowed to leave the country.
Globally, U.S. oil exports have continued to change the dynamics of the international oil market, helping to weaken OPEC’s grip on prices. More U.S. shale will help buyers further diversify supply sources to enhance their own oil security. Indeed, a U.S.-China trade deal is expected soon.
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