Texas flood: US oil exports pour into markets worldwide

This article first appeared in The Edge Financial Daily, on February 9, 2018.
-A +A

IN the two years since Washington lifted a 40-year ban on oil exports, tankers filled with US crude have landed in more than 30 countries, ranging from massive economies like China and India to tiny Togo.

The repeal has unleashed a flood of US shale oil, undercutting global crude prices, eroding the clout of Opec and seizing market share from many of its member countries.

In 2005, before the shale revolution, the US had net imports of 12.5 million barrels per day (bpd) of crude and fuels — compared to just 4 million bpd today.

US producers are making new customers out of some of the world’s biggest oil-importing nations in Asia and Europe, posing a serious competitive threat to the only other countries that produce as much crude: Saudi Arabia and Russia. 

US producers now export between 1.5 million and 2 million barrels of crude a day, which could rise to about 4 million by 2022. The nation’s output is expected to account for more than 80% of global supply growth in the next decade, according to Paris-based International Energy Agency.

Much of the increased flow will go to China, the world’s top importer and, since November, the largest buyer of US crude other than Canada.

Chen Bo, president of Unipec — China’s largest buyer of US crude — said that the firm expects to double US imports this year to 300,000 bpd as it seeks to expand sales in Asia and find new customers for US exports in other regions, including Europe.

Unipec — the trading arm of Asia’s largest refiner, state-owned Sinopec — is also considering long-term crude supply deals with US pipeline and terminal operators. The firm may also partner with such firms to expand and improve US export infrastructure, Chen said in an interview.

“US crude flowing to Asia is a major trend in global oil trading,” Chen said.

Separately, China’s state-owned chemical and oil conglomerate Sinochem Group plans to open a trading office in Houston later this year to source US crude for China’s independent refineries, five sources familiar with the plans told Reuters.

Between 2010 and 2017, US oil production rose from 5.5 million barrels a day to 10 million bpd — approaching a record set in 1970 — as shale fields in west Texas and North Dakota lured massive new drilling investments. That brings national production in line with Saudi Arabia and close to top-producer Russia’s 10.9 million barrels a day.

Saudi Arabia cut output last year as part of Opec’s 2016 deal to reduce supply — after losing a price war with US shale producers that created a global glut.

Most forecasts show US crude output growing about 500,000 to 600,000 barrels per day through the end of 2018, said David Fyfe, chief economist at global commodity trading firm Gunvor Group in Geneva, Switzerland. The US Energy Department is even more optimistic, now expecting growth to rise by 1.2 million bpd — hitting 11 million bpd by year-end.

“The bulk of that growth will likely be exported,” Fyfe said.

US producers are also displacing foreign oil at home.

Total US crude imports have dropped to 7.6 million barrels a day from a peak of 10.6 million bpd in 2006. Opec’s share has declined from more than half of US imports to about 37% as the US relies more on domestic production and neighbouring Canada.

Opec members Saudi Arabia, Nigeria and Angola have been among the hardest hit. In the second half of 2017, US imports from Saudi Arabia averaged 709,000 bpd, lowest since 1987 and down from a peak of 1.73 million bpd in 2003.

Big buyers in India, Europe

US producers have also broken into the market in India — the world’s third-largest oil importer and home to the world’s largest refining complex, operated by Reliance Industries.

Seeking to diversify its foreign supplies, India first imported US crude in October and bought a total of 8 million barrels of US oil last year, according to Thomson Reuters ship-tracking data and shipping data provided by sources.

In Europe, as of November, the US had become the fifth-largest oil supplier to France, according to customs data, exceeding Nigeria, Libya, Iran or the North Sea. In November 2016, the US did not even make the top ten.

China stopped importing Nigerian crude in the fourth quarter, according to Chinese customs figures, and while China’s overall imports rose by 12% in 2017, imports from Saudi Arabia rose just 2.3%.

“They’re taking market share really from Opec nations,” said Olivier Jakob, managing director of PetroMatrix.

Gulf Coast shipping boom

Surging US exports are rippling through the rest of the domestic energy economy. Shipping terminals Texas and around the Gulf Coast are building out infrastructure to handle larger tankers.

“If we didn’t have the option to send that crude to export markets, I think crude oil production would have been much more distressed,” said Jarl Pedersen, chief commercial officer at Port Corpus Christi in south Texas, referring to 2016, when oil prices were still in the 40s.

Pipeline and logistics firms are among the big beneficiaries, as booming crude demand means steadier profits for companies sending oil to the Gulf and storing it for export.

Magellan Midstream Partners, which operates key pipelines from Texas’s Permian Basin to the Gulf, expects to spend more than US$1.7 billion in the next two years on construction projects. Among those are new docks, storage and marine terminals in the Houston area to meet growing demand.

Terminal operators and shippers in the US Gulf are ramping up investment to guard against supply bottlenecks as more barrels leave the US. It can take 18 to 24 months to build an export dock.

In late January, the chief executive officer of the Corpus Christi port forwarded a letter from six energy executives pressing the Trump Administration for US$60 million in federal funding for ship channel improvements as part of a US$320 million project to widen and deepen the port’s ship channel.

Lifting the crude export ban allowed for US$50 billion in industrial projects in south Texas alone, the executives wrote.

“If that project for some reason should stall,” said Corpus Christi’s Pedersen, “that would really make US crude less competitive in Asia.” — Reuters