Big WTI Price Penalty Expected by 2018, as U.S. Light Sweet Crude Overwhelms Domestic Refinery Capacity

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Mae West once said, "Too much of a good thing can be wonderful!" That's not the case for North American oil producers, according to Jim Klingsporn, an analyst at BENTEK Energy LLC (Evergreen, Colorado).

High crude oil prices, strong demand and advanced technologies and techniques have boosted crude-oil production in the U.S. and Canada dramatically in recent years, Klingsporn told about 50 attendees this week at a conference in Denver on "Emerging Real Estate Opportunities in U.S. Oil & Gas Plays," organized by Information Forecast Incorporated (Infocast) (Woodside Hills, California).

U.S. and Canadian crude oil production has risen by 3.1 million barrels per day (BBL/d) since January 2010 to a current level of about 11 million BBL/d, he said. Looking forward, BENTEK sees U.S. production continuing to grow, from current levels of about 7.75 million BBL/d to nearly 10 million BBL/d in 2018. Most of that incremental production has come from the Permian Basin and the Eagle Ford and Bakken shales. That trend is expected to continue. At current prices, crude oil from the Eagle Ford, Permian and Bakken generate internal rates of return of 50% to 70%, Klingsporn told conference attendees Monday.

The majority of this new U.S. crude oil is, and is expected to remain, light and sweet. Normally, that would be great news for refiners: that grade of crude produces a higher percentage of lighter refined products like gasoline, compared to heavier, sourer grades of crude oil.

Unfortunately, a lot of U.S. refineries on the Gulf Coast are set up to process those heavier, sourer grades of crude oil, most of which is imported. U.S. refineries are rapidly reaching a point where they will be overwhelmed by the domestic light sweet crude, Klingsporn warned. By 2018, an overabundance of domestic crude oil and an inability to process it will result in sizable price penalties imposed on West Texas Intermediate (WTI) crude oil, compared to other desirable benchmark crudes like Louisiana Light & Sweet (LLS) or Brent, the BENTEK analyst predicted.

"Because we can't export crude oil and the refineries that can run light sweet crude are running flat out, we see light sweet crude being discounted compared to LLS or Brent until we are able to build new refinery capacity or export crude," he continued. He sees WTI prices at Cushing, Oklahoma, falling from the current-year average of $94 per barrel to $77 per barrel in 2018, a sizable discount to projected 2018 prices for LLS and Brent.

"North American production is putting downward pressure on crude oil prices," he said. "U.S. light crudes will be discounted to world prices until the development of new refining and export options occur."

In PADD III, refiners already have reduced imports of light sweet crude in order to process growing volumes of domestic crude oil. And refiners have a number of process optimization projects under way to incrementally expand their ability to process light sweet crude. But Klingsporn is not optimistic these changes will be enough to forestall a future price plunge for WTI.

There is a small amount of light sweet crude being shipped from PADD III to Eastern Canada, and then reimported as refined product. Industry sources have estimated these volumes at about 47,000 BBL/d as of April 2013--a veritable drop in the bucket.

U.S. law requires a presidential authorization to export crude oil. It's not clear whether that authorization has been granted or what its terms might be. U.S. Department of Energy (DoE) (Washington, D.C.) officials have been quoted in the news media as saying something must be done to modify U.S. crude oil export laws. But some in the U.S. have raised the "resource nationalism" flag, warning about the dangers of exporting crude oil in much the same way they oppose exports of liquefied natural gas (LNG).

Although President Obama can unilaterally authorize crude oil exports, it's not clear this is a fight Obama wants to pick with Congress. Politically, that means the administration may try to negotiate some type of joint authorization with Congress. But given the partisan rift between Congressional Republicans and the White House, it's hard to imagine the parties coming together on the politically sensitive issue of U.S. crude oil exports.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.