As the debate over relaxing the US crude oil export ban continues, Wood Mackenzie is examining the impact that a potential policy shift may have on US export crude oil flows and differentials. Ultimately, while eliminating the US export ban would narrow the Brent – West Texas Intermediate (WTI) differential and raise the wellhead price for US crudes, it would unlikely transform the supply outlook.
Wood Mackenzie analyzes three different qualities of US crude, including oil condensate, Louisiana Light Sweet (LLS), and Mars for respective attractiveness to the Asian (Singapore) and European (Rotterdam) refining centers.
“Relaxing the crude oil export policy constraint could narrow, but wouldn't necessarily drive, Brent – LLS to parity,” explained Skip York, vice president of Integrated Energy for Wood Mackenzie.
According to Wood Mackenzie, there's a particular focus on Brent – LLS, as this price differential is key to the commercial attractiveness of a US crude oil barrel in a competitive global market. The differential to international crude oils likely would narrow, perhaps substantially, as allowing US crude oil exports would change international trade flows.
“Producers may not be able to capture the value of the narrowing differential unless they build an organization (e.g., crude marketing and supply) capable of exporting and trading crude oil in international markets,” York said.
Wood Mackenzie's analysis points out that the quality of a US barrel that might be exported is not obvious. The greater narrowing of Brent – LLS would depend on US exports of light-sweet crude oil to the growing Asian market, with long-haul large parcels. Asia also would have the greatest appetite for crude oils similar to Mars. Whereas Europe places a relatively higher value on condensate, but would have a limited appetite for US light barrels because much of its light sweet crude oil requirements are satisfied by production in the North Sea or Mediterranean regions.
Wood Mackenzie's outlook suggests that the best value for Eagle Ford condensate is to split the barrel locally and sell cuts to a variety of markets.
Finally, Wood Mackenzie believes that the policy debate needs to move beyond the generic notion of US crude exports to a more substantive discussion of potential destinations and types of US crude oil that might be exported. “These details,” York concluded, “are critical to reaching better policy decisions in the nation's interests.”