Light Sweet U.S. Crude Oil May Face Price Penalties Vis-à-vis Imported Heavy Sour Crudes

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The dramatic growth of U.S. light sweet crude-oil production threatens to overwhelm U.S. refiners, and may push prices for light sweet crude below prices for heavier, more sour crudes, speakers told an Oil & Gas conference this week in Denver. Over the previous 10 to 15 years, as industry experts predicted U.S. crude oil imports would inexorably increase, U.S. refiners made significant capital investments in their plants to process the heavier, more sour grades of crude that were expected to comprise a growing share of the U.S crude oil market.

But the future didn't turn out that way. Today, domestic production of light sweet crude oil from formations like the Eagle Ford, Permian and Bakken has risen dramatically, and is widely expected to continue doing so for the next few years. That's causing U.S. refiners significant operational, processing and investment challenges. Currently, light sweet crude oil cannot be exported, and U.S. refiners are processing all the light sweet crude they can.

U.S. crude oil production totaled about 6.5 million barrels per day (BBL/d) in 2012, an increase of about 1.5 million BBL/d from 2008 production levels, John Auers, senior vice president at Turner Mason & Company (Dallas, Texas), told about 250 attendees at the 7th Annual Platts Rockies Oil & Gas Conference on Monday. By 2015, domestic production could hit 9 million BBL/d, and Auers' firm projects domestic production may reach 11 million BBL/d in 2019. That's way more than U.S. refiners can process. If U.S. producers can't find a way to export light sweet crude oil, they could be stuck in a perverse situation where domestic light sweet crude is assessed a price penalty compared to heavy sour crude that is imported.

Over the 2012-20 period, Auers projects crude oil production from the Permian, Eagle Ford and Bakken formations will increase by between 2.25 million BBL/d and 3.25 million BBL/d. "As crude oil production continues rising, refiners in PADD III will soon reach their limit to absorb more light sweet crude. As the market becomes oversupplied, we expect Bakken deliveries to PADD III to decline dramatically over the next two years."

Some of the Bakken crude is making its way to PADD I, in the East Coast, Auers remarked: "Waterborne imports of crude oil into PADD I are gradually being replaced by Bakken crude delivered by rail." And some of that Bakken crude will be transported by rail to a refiner in Washington state.

But there are a limited number of other domestic options to process increasing amounts of light sweet crude. PADD II is expected to increase reliance on its in-region production and imports of Canadian heavy crude. Crude-oil production in the Rockies--PADD IV--already exceeds the region's refining capacity. Many refiners located in California-- part of PADD V--are configured to process heavier, sourer grades of crude oil. Auers sees growing outbound transportation of crude oil from PADD IV, but neither he nor other speakers had any clear idea where it would go: "Finding markets for growing crude oil production, or ways to access other markets, is critical."

There is a silver lining to this crude oil supply-demand dilemma, at least for the near term: PADD IV refiners should continue to experience superior margins, Auers said. They have lower crude costs than in other regions, and the local demand for refined products is growing faster than U.S. averages. But ultimately, he said, most of the incremental crude oil produced in PADD IV will find its way to other PADDs, if it is not exported.

Rusty Braziel, president of RBN Energy (Houston, Texas), agreed with Auers and other speakers that U.S. light sweet crude oil prices could fall below the price of heavy sour crude if crude-oil exports, or some type of exchange, can't take place with other markets. Exporting crude would be a sensitive subject politically, speakers said, but there could be ways to execute swaps that allow politicians and the industry to say the U.S. is not actually exporting its crude oil.

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