The changing dynamics of the U.S. crude market have had a major impact on global trade. Following the U.S. government decision to allow crude to be exported in 2015, producers have been able to explore new markets. Growing domestic U.S. supplies have resulted in arbitrage opportunities to non-U.S. destinations. U.S. Energy Information Administration (EIA) data showed that U.S. crude production averaged 12.3 million barrels per day by the end of May 2019; double the level seen ten years prior. As a result, WTI is exerting a major influence on international crude oil pricing and is challenging Dated Brent as a global reference price.
Using data from the EIA and the BP Statistical Review of World Energy, we have compiled an estimate of the total volume of crude oil priced against each reference price:
|Crude Oil Price Reference||Global Volume (million barrels per day) *||Percentage of Global volume|
|Argus Sour Crude Index (ASCI)||1||1%|
|Platts Dated Brent||31||31%|
**DME volumes adjusted to include Saudi Asian exports
***Internal consumption outside the U.S, Europe and Canada with no transparent pricing reference (often impacted by government subsidies)
The starting point for our analysis is oil consumption, as the price reference is typically determined by the consuming region. Broadly, this will be WTI in north America, Brent in Europe, and in Asia Dubai and Oman. Table 1 shows that the volume of consumption directly or indirectly referencing WTI is significant. Total volumes are rivalling the total volume referencing Dated Brent. These volumes are clearly estimates but they do point to a growing trend: the increased influence of WTI on the global crude oil market. Some important changes have occurred in relation to benchmark referencing. Saudi Aramco changed the price reference for 50% of its Asian crude exports from Platts Oman to DME Oman1 in July 2018. In addition, Saudi Aramco moved from the Brent Weighted Average (Bwave) to the ICE Brent settlement for pricing its westbound crude sales2.
In late 2018, the U.S. Gulf Coast (USGC) moved from a net importer to a net exporter (see chart 1 below). The USGC arguably sets the price of the marginal crude oil barrel, and this helps explain the growing influence of WTI in pricing global crude oil flows. A CME Group auction for U.S. crude oil in conjunction with Enterprise Product Partners LP was launched in March 20193 and two auctions have been held since launch. International participation was high, reflecting the growing interest in U.S. crude oil. In November 20184, NYMEX listed the WTI Houston futures (commodity code HCL) and options (commodity code HCO). The futures offer physical delivery to the Enterprise Houston system including the Enterprise terminal and ship channel.
U.S. exports accelerated from 2016, increasing the relevance of WTI on the global stage. European and Asian refiners have been significant international buyers of U.S. crude oil. This provided an opportunity for U.S. producers to compete head on with the traditional suppliers to Europe and Asia. The latest EIA data shows that Asian and European imports of U.S. crudes were around 1.8 million barrels per day in 2018, double the level from 12 months earlier. The first quarter of 2019 shows a similar trend to 2018.
The shift of the Brent price discovery centre to Rotterdam may create further opportunities for WTI. From October 2019, S&P Global Platts (Platts) will assess the value of dated Brent including delivered North Sea crudes at the Dutch port of Rotterdam alongside the existing FOB locations for the first time4. In February 2019, to capture the growing influence of non-North Sea grades in Brent, Argus Media (Argus) began assessing their own dated Brent price to sit alongside their existing Brent assessment5. The assessment referred to as “new dated Brent” is using delivered grades of other light, sweet crude grades, such as WTI6 as well as Mediterranean and Caspian crudes. According to analysis by Argus, imports of U.S. crude oil are determining the price for the North Sea one-third of the time. Importantly, Argus has also stated that in 20197 they believe that the volume of U.S. crude oil refined in Europe could be around 900,000 barrels per day and would likely surpass the combined production of Brent, Forties, Oseberg, Ekofisk and Troll (BFOET).
In January 2019, European refiners imported 1.18 million barrels per day (see left hand chart) whilst North Sea BFOET production was around 950,000 barrels per day, according to EIA and Bloomberg data (see right-hand chart above). Platts analysis shows that without new oil fields being added to the existing BFOET supply, production could fall to as low as 500,000 barrels per day by 2025, which is less than one North Sea cargo per day.
Asian oil demand increased from 22 to 36 million barrels per day between 2000 and 2018, according to the 2018 BP Statistical Review of World Energy. Demand in this region accounted for about 35% of global demand in 2018 compared with 27% in 2000.
Demand growth partly explains the growing interest in U.S. crudes. The region has seen some of the largest increases in U.S. imports into Singapore, South Korea and China8. Some refiners outside Singapore, South Korea and China have also imported U.S. grades for the first time. In April 2019, Indonesian refiner Pertamina imported 600,000 barrels of WTI Midland crude for June 2019 delivery9. Furthermore, Taiwanese refiner CPC10 agreed to purchase 2 million barrels of WTI Midland crude each month between February and June 2019. These types of deals are helping to spread the influence of WTI-related pricing into the Asian markets, which have traditionally been more Brent related.
CME Group data shows that the volume of WTI crude oil futures traded during the Asia business day have been rising steadily. Based on the latest exchange data, WTI futures volumes traded during Asian hours accounted for between 20% and 25% of total daily traded futures volumes during the first quarter of 2019.
Pipelines and storage capacity in the USGC are being expanded to accommodate higher volumes of crude flow for export. Pipelines that once flowed “inwards” into the U.S. mid-continent have been reversed. Port logistics are being adjusted to handle increasing volumes of large cargo shipments from the U.S. to the global refining centres. Crude oil pipelines from the U.S. Midwest have also been re-directed to the Gulf coast (for export).
Houston is one of several major developments on the USGC as producers aim to boost the volume of crude oil that can be exported from the U.S. Other terminals, such as Corpus Christi and Freeport in Texas, are also becoming significant export locations. At these locations, ports capable of handling 2 million-barrel shipments are planned for 202011.
The influence of WTI as a price reference beyond the Americas market is increasing. Favourable U.S. dynamics regarding export flows from the USGC have seen much higher crude flows shipped more regularly to Europe and Asia. Longer term changes to Brent to allow U.S. grades to be delivered into Rotterdam could be a positive step for increasing the influence of WTI prices beyond North America. All these changes combined are all very beneficial to the continued growth of the U.S. benchmark on the global stage.
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