Crude Oil Supply: The USA Factor

The oil markets have largely been on a bullish path in 2022. It is ironic that the lowest price of crude oil for this year – $74.47 per barrel – was realised on the first trading day of the year. Since the start of the year, oil markets have only driven upwards having reached the highest price of $130.50 per barrel on March 7, 2022, during the peak of the Russia-Ukraine conflict. Although oil markets have factored in other attributes, they have rarely seen a sustained influence of bearish elements.

One driving bearish element is the enhanced supply from the North American shores to equalise the market dynamics between demand and supply. The crude oil output from North America is expected to keep rising in the near future. With increased production, the expansion of midstream infrastructure and a shrinking North American refining system, export volumes of WTI from the US Coast are all converging to break existing records.

Uncertain Slope of Production Growth

The discussion on production growth is circling the point of how much and when will key factors contribute to the global crude and refined product deficits to register record pump prices. The growth estimates of the US range from 800,000 to 1.8 million barrels per day. The estimates also conjecture that more than half of the estimated value will be available in the second half of the year. The oil supply data from the Western Canadian area has already exceeded pre-Covid levels and could incline to over 500,000 barrels per day from its 2019 peak by 2024.

Enhanced Pipeline Capacity

The major pipeline operators from the Permian Basin, including Plain All American, Magellan Midstream and Enterprise Products, all point to the rising system utilisation in their latest investor materials, with a forecast through 2025 still highlighting spare crude oil pipeline capacity from the area. The regional prices for the standard oil i.e., light sweet crude also reflect adequate space for production growth. In 2018, Shale production outpaced the construction of pipelines, filling regional storage tanks to capacity. Since then, over five million barrels per day of pipeline space was added. The major proportion connects production directly to the Gulf Coast. The Western Canadian production delivery capabilities to the Gulf Coast have also been extended.

Exports Forecasted to Rise

There is little scope for refiners to consume more volume although there are sufficient pipelines to deliver growing oil production to the Gulf Coast. The refining capacity in the Gulf Coast has decelerated since the previous oil production peak. The two major refineries in Louisiana area closed in 2021 and a shutdown of a third in Houston is planned for 2023. With the closure, the refineries will expose a combined loss of approximately 750,000 barrels per day.

Without local demand, most parts of the Permian Basin and the Western Canadian growth will need to make their way to the export docks along the Gulf Coast. As per RBN Energy, it is estimated that the effective capacity of the area export terminal will be six million barrels per day, leaving ample room to grow from the current levels. The average export over the four weeks ending May 27 were 3.7 million barrels per day, up from 2.7 million in the first quarter and in line with the prior high levels. Production forecasts imply that North America may add an additional 2 to 2.5 million barrels per day to offer the global refining market over the next 24 months while the seasonal refinery maintenance and withdrawals from the Strategic Petroleum Reserve (SPR) may temporarily inflate the exports.

WTI: A Leader

With export volumes expected to skyrocket towards five million barrels per day in the next few years, the US Gulf Coast is poised to be the second-largest origin for waterborne crude oil behind unassuming Saudi Arabia. While the exports of heavier Western Canadian grades will also surge, most of the increase will be in the Permian Basin light sweet crude oil.

Conclusion

The uncertainty in the timing and the rate of increase in the production of North America is unsettling when the inventories are tight and the prices are inflated. With that said, an upsurge in production is around the corner. As opposed to 2018, there is little uncertainty about the midstream sector’s ability to transport the product to where it is required. As production will outpace demand, WTI will be increasingly available on the US Gulf Coast to soften shortages and in the long run will account for a larger share of the global refinery slab.

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Vivek Risal

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]

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