WASHINGTON: The great disruptor that is U.S. shale oil is coming to Asia, as refiners in the energy-hungry region look to expand and diversify their sources of crude, and the consequences will likely go well beyond a shift in oil trade flows. It should come as no surprise that rising oil output in the United States would find its way to the region that is the world’s fastest-growing consumer of the fuel, but perhaps the rapid pace of the shift has caught some in the market off-guard.
Crude oil exports to Asia from the United States are still relatively small-scale, with Thomson Reuters Oil Research and Forecasts estimating flows of around 261,000 barrels per day (bpd) in the first eight months of the year. However, this is about 10 times what they were in the same period last year. Major buyer China has gone from taking just one cargo of under 1 million barrels in the January-August period in 2016 to buying about 115,000 bpd from the United States so far this year. It’s also likely that U.S. shale oil exports will rise sharply in the next couple of years as production grows rapidly. In one of the major U.S. shale plays, the Permian Basin, output is expected to surge to 2.9 million bpd by next year from the current 2.4 million, Ryan Krogmeier, vice president of crude supply and trading at Chevron, told the S&P Global Platts Asia Pacific Petroleum Conference in Singapore on Monday. Much of this production will be exported as U.S. refiners along the Gulf Coast aren’t capable of processing more light crude, having been set up to deal more with heavier and sour grades from offshore Gulf of Mexico platforms and imports from the Middle East. That leaves Asia as the clearing house for U.S. crude. But there are several factors that have to work together to ensure that U.S. crude does actually flow east. The first, and most important, is that U.S. crude has to remain at a significant discount to similar grades, given the higher loading and shipping costs.
U.S. shale crude is largely priced against West Texas Intermediate (WTI), while the other light grades that typically move to Asia, such as crude from Angola and Nigeria, are priced against Brent, often described as the global benchmark. The spread between the two grades has widened recently, with Brent closing at $59.02 a barrel on Monday, a premium of $6.80 to the closing trade for WTI. Effectively investors are taking the view that there is still surplus crude in the United States, home of WTI, while the market for Brent is starting to tighten as efforts by the Organization of the Petroleum Exporting Countries and allied producers start to drain global inventories.
