The US closed 2017 with crude supply up by approximately 1 million barrels/day. This put production back at the previous peak seen in 2015 at 9.6 million barrels/day, a major turnaround from the low point of 2016 at 8.6 million barrels/day.
Most of this growth is coming from the Permian Basin in West Texas and New Mexico where producers were optimizing efforts to produce at below $50/bbl. And virtually all the incremental volumes are flowing to the Gulf Coast. Over-investment in pipeline capacity to the coast has provided plenty of capacity to move additional supply. While refiners on the coast have upped their intake of domestic crude to the limits that its lighter quality allows – this has still resulted in a big growth in exports, up to 1.4 million barrels/day by the end of the year.
The impact on US crude pricing is clear. Gulf Coast light sweet crude has fallen from an average of $ 0.90/barrel premium to Brent in 2016 to a discount of $1.50/barrel by the end of 2017. Prices appear to be settling at the levels where Gulf Coast light crude is competitive with other Atlantic Basin light crude (North Sea and West African) on a delivered basis to refineries in Asia. This shift in crude location differentials has big implications across the value chain:
- Gulf Coast competitiveness – Falling local crude prices (relative to international benchmarks) adds to Gulf Coast refiners’ competitiveness as a major supplier of product to the international market, especially relative to European refiners.This is likely to support sustained high utilization, even in the face of flat to falling US demand.
- Asia refiner crude slate – Asian refiners should continue to see a wider array of choices, in terms of quality and source.However, to take full advantage they may need to consider different sourcing strategies.
- US pipelines – The growth in Permian supply is pushing pipelines to higher utilization with more volumes moving at higher spot tariff rates, all good news for pipeline owners.There is also likely to be a need for a new wave of capacity investment.
Tim Fitzgibbon is a senior industry expert based in Houston.