Surging transportation fuel demand and strong US crude oil exports are driving a robust recovery in global oil prices led by CME Group’s NYMEX Light Sweet Crude Oil futures contract (“WTI futures”) as the price discovery leader in the crude oil market. Coupled with production restraint by the US, OPEC and Russian producers, WTI futures prices have rallied 50% in the first half of 2021 to the highest level in six years as refiners in the US and Europe race to meet the surging demand.
The growing competitive position of WTI-type crude oil in world markets is driven by two key factors: 1.) US export growth; and 2.) surging US transportation fuel demand that is outpacing demand growth in Asia and Europe.
In 2020, US crude oil exports to Europe surpassed the total supply of Brent (BFOET) crude oil streams, as European refiners have looked to WTI to replenish the declining supply of Brent-related crude oil streams. As US crude exports gain deeper penetration in the global oil markets, WTI has extended its leadership as the key price-setting indicator in the crude oil markets.
The strength of US transportation fuel demand has outpaced demand growth globally as the US economy has recovered at a faster pace than Asian and European economies. US gasoline demand reached a record high of 10 million barrels per day (b/d) in the week ending July 2, 2021, according to the Energy Information Administration (EIA). The strong US refinery demand has driven the pull on WTI supply, and has led to the strength in WTI prices relative to Brent and Dubai crude oil. The relative strength of US fuel demand is reflected in the Brent vs. WTI arbitrage, which has collapsed from $4.00 per barrel in April 2021 to around $1.00 per barrel in July 2021.
Further, the strength in WTI prices has also been propelled by flat US crude oil production, which has held at 11 million b/d for the first half of 2021, down from the peak of 13 million b/d in November 2019.
Cushing, Oklahoma is the key nexus of market fundamentals for the global crude oil market, with nearly two dozen pipelines and 20 storage terminals with shell capacity of 100 million barrels, the largest storage hub in the world. The US pipeline market provides a highly liquid and straight-forward structure for pricing physical crude oil, with a robust spot market at major trading hubs in Cushing, Midland and Houston.
Further, Cushing storage levels are highly visible and published weekly by the US Energy Information Administration (EIA) providing important transparency to the marketplace. In contrast, the Brent loading terminals in the North Sea have zero storage capacity, and waterborne floating storage is opaque and not reported publicly.
WTI-type crude oil is directly connected to the export market in the US Gulf Coast via pipelines from Cushing, Oklahoma and Midland, Texas. The Cushing hub is directly connected to the Gulf Coast waterborne terminals via pipeline with nearly 2 million b/d capacity; the Midland, Texas hub is linked to the export market with over 5 million b/d of pipeline capacity. Consequently, WTI now rivals Brent as the global benchmark.
The growth in exports has been transformative for the US crude oil market. The US Gulf Coast has become a major export hub, and new infrastructure has been constructed to process the growing export volumes.
In June 2021, US crude oil exports climbed to 3.55 million b/d almost reaching peak exports of 3.7 million b/d recorded in February 2020. The main destination for US crude oil exports in the first four months of 2021 was Asia at 1.4 million b/d, followed by Europe which averaged nearly 1.0 million b/d. As US crude exports gain deeper penetration in the global oil markets, the US has become a dominant supply source for the European refining market. Consequently, WTI has extended its price-discovery role as the marginal supplier of oil to Europe.
Surging US crude oil exports to Europe surpassed the total supply of Brent crude streams in the North Sea in 2020. US crude oil cargoes delivered to Europe averaged 1.15 million b/d in 2020, compared to average Brent loadings of 870,000 b/d. Cargoes of WTI are now actively traded in Rotterdam, and both Platts and Argus are publishing assessments for WTI delivered to the European market. With daily export volumes of over one million b/d to Europe in the first half of 2021, WTI is now a baseload grade for the European trading community and its refiners, according to Platts.
The WTI futures contract and its underlying physical market are the most liquid and transparent in the world. In 2020, a milestone was reached when US crude oil exports to Europe surpassed the total supply of Brent crude oil streams, establishing WTI as a key price marker for the European oil market. Consequently, WTI has expanded its price-discovery role as the marginal supplier of oil to Europe. As US crude exports have gained deeper penetration in the global oil markets, the WTI benchmark has extended its reach as the price discovery leader in the crude oil market.
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