The U.S. shale boom has driven the cost of Gulf Coast light, sweet oil to its lowest level versus Brent crude in almost a quarter century as the nation’s dependence on foreign supplies wanes.
Light Louisiana Sweet, the benchmark grade for the Gulf Coast known as LLS, has traded on the spot market at an average of 15 cents a barrel more than Brent this year, the smallest premium since at least 1988, data compiled by Bloomberg show. The spread’s highest annual average was $4.02 in 2008.
The drop has cut costs for refiners in Texas and Louisiana accounting for 45 percent of U.S. capacity and replaced competing shipments from Africa. Gulf imports of light, sweet crude have fallen 56 percent since 2010, according to U.S. Energy Department data. A shale-oil influx from the Eagle Ford formation in Texas and Bakken in North Dakota and new ways to bring crude to the Gulf, such as this year’s reversal of the Seaway pipeline, may accelerate the shift.
“The market dynamics are changing,” Edward L. Morse, head of commodities research at Citigroup Global Markets in New York, said in a telephone interview. “When the Gulf Coast was a crude importer, they had to attract crude from elsewhere in the world, which meant LLS had to be at a premium to Brent. But now we’re moving into a totally different situation.”
Light Louisiana Sweet, a grade prized because its low- sulfur content and density make it easier to process into fuels such as gasoline, was 92 cents cheaper than Brent yesterday. It averaged 20 cents less than the benchmark in the third quarter.
Brent oil for October settlement rose 40 cents, or 0.4 percent, to $113.49 a barrel yesterday on the London-based ICE Futures Europe exchange. The contract advanced as much as 0.5 percent to $114.05 in trading today.
U.S. oil output surged to the highest level in 13 years in July, according to weekly Energy Department data. The U.S. met 83 percent of its energy demand from domestic sources in the first five months of this year and is heading for the highest annual level since 1991, department figures compiled by Bloomberg show.
“Unconventional oils and gas are changing everything about our competitiveness in the United States,” Bill Klesse, Valero Energy Corp.’s chief executive officer, said yesterday at the Barclays CEO Energy/Power Conference in New York. “Before you know it, we’re going to have so much light, sweet crude that in the U.S. Gulf Coast we’re not going to be importing light, sweet crude, and we think that happens next year.”
Houston, New Orleans and other ports along the Gulf Coast accepted about 554,000 barrels a day of light, sweet oil from outside the U.S. in June, down from 964,000 barrels a day in June 2011 and about 1.25 million in June 2010, according to the Energy Department’s Energy Information Administration.
The West African nations of Nigeria, Angola, Gabon and Equatorial Guinea accounted for 58 percent of the light, sweet crude imported into Gulf Coast ports in June 2012. North African nations accounted for a further 30 percent.
LLS will become about $5 a barrel cheaper than Brent during the next 12 months, David Pursell, a Houston-based managing director for Tudor, Pickering, Holt & Co., said in a telephone interview. The discount would take into account the extra cost of getting LLS to other customers, such as refiners on the East Coast, Pursell said.
Like oil in the Midcontinent, the relationship between LLS and Brent has been upended by surging shale production. West Texas Intermediate oil at Cushing, Oklahoma, the U.S. benchmark grade traded on the New York Mercantile Exchange, shifted to a discount to Brent almost two years ago after trading at a premium for decades.
Cushing inventories surged to 47.8 million barrels in June, the highest level since Energy Department records for the hub began in 2004. The WTI-Brent spread reached a record $27.88 in October. It was at $18.03 a barrel today.
“Over the last year and a half, with the WTI-Brent spread blowing out, the primary beneficiaries have been the Midcontinent players,” Cory Garcia, a Houston-based oil analyst for Raymond James & Associates, an arm of the financial-services company with almost $40 billion under management, said in a phone interview. “As LLS disconnects next year, the benefits to Gulf Coast refiners will be brought to the forefront.”
Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) reversed the flow of crude on the Seaway pipeline on May 19. The link, carrying as much as 150,000 barrels a day from Cushing to Gulf Coast refineries, is scheduled to pump as much as 400,000 barrels a day early next year.
- Report: Shale boom revamping U.S. refining industry (fuelfix.com)
- Gulf of Mexico production ramps up after Isaac (fuelfix.com)
Obama administration officials ripped into GOP proposals to tie Strategic Petroleum Reserve releases to increases in federal oil and gas land leases and to require new analysis of the economic impacts of several gasoline-related environmental regulations.
A new GOP bill would require a new interagency panel to analyse how certain future Environmental Protection Agency rules might impact gasoline prices and jobs, but an EPA official said the bill wouldn’t reduce prices at the pump and could threaten Clean Air Act health protections.
The Gasoline Regulations Act targets a number of looming EPA regulations, including one for cutting sulfur in fuel by two-thirds, U.S. ozone standards and refinery emissions standards.
Gina McCarthy, an EPA assistant administrator, said in written testimony that the bill appears to use high gas prices as the reason to rollback public health protections, but those protections have little to do with gasoline prices. The bill would also duplicate analysis that is already done by officials.
“This legislation also delays — indefinitely — rules that EPA has not even proposed,” McCarthy said. “In short, this legislation does not address the reasons for the recent increase in the price of gasoline, while rolling back core aspects of the Clean Air Act — which was passed on a bipartisan basis and signed by a Republican president.”
Gasoline prices have steadily become a growing political point as prices rise near the $4 mark for the first time since 2008. The national average hit $3.91 Wednesday, a rise of 2 cents, according to the AAA gas gauge. Houston drivers are paying $3.87, or 9 cents below the record-high price of $3.96 in July 2008.
As prices have risen, the Obama administration has touted an “all-of-the-above” energy plan that officials say is the best long-term solution to the rising energy costs. Republicans, however, have argued the administration should remove unnecessary regulations and spur domestic drilling.
Republicans have also recently proposed that a 1 percent increase in federal lands leased for oil and gas production be required for every percentage point drawdown in oil from the strategic reserve, a 700-million-barrel stockpile on the Gulf Coast for emergency supply disruptions.
That proposal also came under fire by Obama administration officials.
Deputy Assistant Energy Secretary Chris Smith said in written testimony that the Strategic Energy Production Act would make it more difficult for to respond promptly to supply interruptions in crude oil. He argued that the bill would also make release from the strategic reserve more dependent on actions of potential lessees.
“It would also limit DOE’s ability to manage the SPR on a day to day basis, in which releases occasionally are necessary for the routine maintenance and operation of the reserve,” Smith added.
Republicans are proposing the legislation in seeking to position themselves against Democrats and the White House on oil and gas policy, which has surged to the forefront of political debate in the wake of higher gasoline prices. GOP lawmakers insisted Wednesday their legislation would increase oil supplies and decrease refining costs, helping put downward pressure on gasoline prices.
Democrats have called for cracking down on what they view as excessive speculation in oil markets and urged the White House to consider releasing oil from the strategic reserve.
But analysts have repeatedly said policymakers have few, if any, short-term tools to address gasoline prices, which are tied to oil prices set on global markets.
James Burkhard, managing director at IHS CERA, a research firm, said in written testimony said the current run-up in oil prices, the biggest determinant of what consumers pay at the pump, stems from geopolitics, specifically from uncertainty linked to the Iranian nuclear issue.
Analysts have said increased U.S. drilling would take years to kick in and would have, at best, a fractional impact on oil prices. They also have said the strategic reserve is intended for use only during supply emergencies, not as a price-smoothing tool as some Democrats have advocated.
Obama has ripped into GOP proposals to expand drilling into new waters and lands as an election-year “bumper sticker” that wouldn’t reduce gasoline prices. He has touted an “all-of-the-above” strategy of more oil, gas, renewable energy and fuel-efficiency boosts to cut oil use as a long-term strategy for U.S. energy independence.
- US Gasoline Prices Top $3.90 (247wallst.com)
The energy industry has the appearance that it is about to undergo a major shift in pricing structures again. We saw it lately with the spread between crude and NG blowing out. We have seen signs of it happening in Brent and WTI before, and I expect we will see new signs of it again.
To be clear, we could see extremely expensive Brent oil, as international supply fears increase with tension in Iran. This would be happening while the price of WTI, a lighter sweeter standard, crashes in US terms do to its own over supply and lack of demand issues.
This would all be happening under a backdrop of world markets bidding for refined products from a US export happy refining complex. This would lead to US gasoline prices hitting all-time highs, while refinery complexes in the US Midwest would have the highest profit margins in their history.
The US Midwest is growing its own domestic sources of oil, while its own capacity to ship the oil out is limited. This causes a bottle neck in exports in the region. This is causing the price locally to crash.
The planned refinery work in the Midwest has lowered the take-off demand for Bakken oil. This is happening inside of a window of time while the Bakken production sets all new production records every month.
This is causing the price of oil in the Midwest to crash in localized markets, as the take-off capacity does not equal the supply of new barrels. The region is buried in supply, all of which is now seeking a path to Houston refining complex.
The price difference of an equivalent grade of oil in Bakken Terminals & Louisiana terminals is now $40. This imbalance in like qualities will generate a short term arbitrage trucking bonanza, as the profit per trip approaches silly levels.
I expect to hear about a fleet of white trucks driving loads of crude oil from the Midwest to the refining complexes with accessible pipelines capacities. You don’t have to drive it all the way there, to deliver it.
I wish I had a fleet of modern fluid haulers right now. There is more oil supply in the Bakken then local demand, and that won’t change much when the refinery’s turn around. The Bakken supply is still growing every month, and will for a while.
The growth in rail take off capacity will not keep up with the growth in new oil production in the near to intermediate term. This will lead to price differentials that will last longer than people expect. There is always a profit to be made when these events happen. It will be interesting to see who ends up owning those fleets of white trucks.
Just like the old gold rush stories of stores making more then people digging for gold. There just might be more money made in shipping the oil by truck, then there is in producing it, or refining it. As they say, this could get interesting in the near term.
Read more: BI
- Conoco’s Brent Control (mb50.wordpress.com)
- Brent WTI Back To $20 – Some Thoughts On What’s Next From Goldman (zerohedge.com)
- Seaway Pipeline gets turned around; oil markets react quickly (mb50.wordpress.com)
- Seaway pipeline creates contango with oil glut (mb50.wordpress.com)
- JP Morgan Hikes 2012 Crude Price Target To $110 On Seaway Reversal (zerohedge.com)
- InvestmentOptions.Net Releases Response to President Obama’s Decision to Reject Keystone Pipeline (prweb.com)