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Last Updated: July 16, 2021
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Following the rapid growth of U.S. crude oil production since 2010, the U.S. government lifted restrictions on crude oil exports in December 2015. Before the restrictions were lifted, exports were less than 0.5 million barrels per day (b/d), but subsequent U.S. production growth caused price spreads between international (Brent) and domestic (West Texas Intermediate, or WTI) crude oil benchmark prices to widen. WTI averaged $10 per barrel (b) less than Brent from 2011 to 2014. Since the policy change in 2015, U.S. crude oil exports have increased significantly and have averaged more than 3.0 million b/d since 2019, despite narrowing price spreads, significant price drops, reduced demand, and less production since early 2020, when the U.S. market began to react to the COVID-19 pandemic. Weekly export data from our Weekly Petroleum Status Report show a slight growth trend in crude oil exports since June 2021. As of the week of July 9, 2021, U.S. crude oil exports averaged 3.51 million b/d, and Brent and WTI spot prices averaged $76.13/b and $73.35/b, respectively (Figure 1).

Figure 1. Crude oil spot prices and four-week average U.S. crude oil exports

Since 2015, U.S. crude oil export infrastructure, including pipelines and terminals, has expanded rapidly in the Texas Gulf Coast, particularly at the ports in Corpus Christi and Houston. As a result of this infrastructure expansion and a significant increase in domestic production, crude oil exports grew rapidly when benchmark prices remained above $50/b in 2018 and 2019, and they declined only moderately when the market dropped sharply in 2020. Between March 20 and June 19, 2020, four-week average U.S. crude oil exports declined about 31% and refinery inputs declined 13%. Crude oil exports declined more than refinery inputs in the same time period. In early 2021, both Brent and WTI prices increased to 2019 levels, and the price spread between Brent and WTI had narrowed to less than $2/b as of June 25 from about $8/b at the end of 2019. Four-week average crude oil exports had increased to 3.5 million b/d during the same period. In addition, WTI prices higher than $70 will contribute to an increase in U.S. crude oil production, which in turn will likely contribute to growth in U.S. crude oil exports.

The growth in U.S. crude oil exports in the first half of 2021 has been predominantly sourced from oil produced in the Permian, Eagle Ford, and Bakken regions, but crude oil exports also increasingly contain Federal Offshore Gulf of Mexico crude oils such as Mars and Southern Green Canyon, based on export data from ClipperData (Figure 2). Because the Permian and Eagle Ford regions are close to the Texas Gulf Coast, crude oil produced in these regions is usually exported from the Gulf Coast region (PADD 3). Prior to pipeline networks expanding to connect to the shale regions in North Dakota and Texas, rail transportation was an important means of delivering crude oil, mainly from the Bakken region in the Midwest (PADD 2), to refineries and crude oil export terminals.

Figure 2. U.S. monthly crude oil exports by select production regions

Pipeline development continues to play an important role in the growth of U.S. crude oil exports. Historically, U.S. refiners imported crude oil to the Gulf Coast by marine vessels and then transported some of the imported crude oil to the Midwest through pipeline systems such as Seaway and Capline, which flowed north from the Gulf Coast to the Midwest.

With rapidly increasing crude oil production, the demand to move imported crude oil from the Gulf Coast to the Midwest declined. As a result, the volume of crude oil moving through the Seaway pipeline dropped, and the pipeline was reversed in June 2012 to flow south and transport growing domestic crude oil production from the Bakken to the Gulf Coast. The Houma-to-Houston (Ho-Ho) pipeline, renamed the Zydeco Oil Pipeline in 2014, was also reversed in December 2013 to transport crude oil from the Texas Gulf Coast to Louisiana Gulf Coast primarily for refinery processing.

Such structural changes diminished the flow of crude oil from the Gulf Coast to the Midwest and contributed to the rapid increase of crude oil exports (Figure 3). Most U.S. crude oil exports leave the country from Texas ports, but some leave from Louisiana ports. Based on estimates from ClipperData, crude oil exports from Texas have been as high as 1.9 million b/d at Corpus Christi in June 2021 and 0.9 million b/d at Houston in May 2019. In Louisiana, they have also been as high as 0.4 million b/d at Morgan City in April 2021 and 0.3 million barrels at Baton Rouge in July 2018.

Figure 3. Monthly crude oil pipeline movements

Crude oil exports could further expand as more infrastructure is modified. Recently, Marathon Pipeline (MPLX) announced Capline’s reversal proposal. The total Capline pipeline capacity of more than 1 million b/d from the Louisiana Gulf Coast to the Midwest has been idled for several years as domestic crude oil and crude oil from Canada displaced imported light crude oil. In the proposal, light crude oil produced in Bakken and heavy crude oil from Canada will be transported from Patoka, Illinois, to St. James, Louisiana, via the reversed Capline pipeline. The initial reversal project planned for light domestic oil to be transported from Cushing, Oklahoma, to Memphis, Tennessee, via the existing Diamond pipeline through an extension and a newly constructed connection to Capline (Byhalia Connection). The pipeline would then travel from Memphis, Tennessee, to St. James, Louisiana, via the reversed Capline (Figure 4). On July 2, 2021, however, project developers Plains All American and Valero announced they were canceling the Byhalia Connection project, which our pipeline database had expected to be in operation by the first quarter of 2022.

Figure 4. Expected change in Capline pipeline flows

The Memphis Valero refinery owns an existing pipeline, the Collierville pipeline (not illustrated in Figure 4), connecting the refinery at Memphis and a terminal of Capline pipeline in Collierville, Tennessee. The Byhalia connection was proposed as an expansion of the Collierville pipeline. Because the Byhalia project was canceled, the future of the idling Collierville pipeline is uncertain. However, the pipeline could be an option to bridge not only the Memphis Valero refinery with Capline to source Canada’s and the Bakken’s crude oil but also allow WTI crude oil to flow to the Gulf Coast on the Capline pipeline.

Nonetheless, if Capline is fully reversed, it could transport light crude oil from the Bakken region and Canada to Louisiana for refinery processing and exports. In addition to increasing U.S. export capacity, such a reversal may continue to contribute to significant changes in the U.S. petroleum industry, particularly in heavy oil imports from Canada to the Gulf Coast, refinery inputs in the Gulf Coast and Midwest, and crude oil exports from the Gulf Coast.

U.S. average regular gasoline and diesel prices increase

The U.S. average regular gasoline retail price increased more than 1 cent to $3.13 per gallon on July 12, 94 cents higher than the same time last year. The Rocky Mountain price increased more than 5 cents to $3.49 per gallon, the Gulf Coast price increased 3 cents to $2.83 per gallon, the West Coast price increased nearly 3 cents to $3.87 per gallon, and the East Coast price increased nearly 1 cent, remaining virtually unchanged at $3.01 per gallon. The Midwest price decreased less than 1 cent to $3.02 per gallon.

The U.S. average diesel fuel price increased less than 1 cent to $3.34 per gallon on July 12, 90 cents higher than a year ago. The Rocky Mountain price increased nearly 8 cents to $3.59 per gallon, the West Coast price increased nearly 1 cent to $3.91 per gallon, and the Gulf Coast and East Coast prices each increased nearly 1 cent, remaining virtually unchanged at $3.08 per gallon and $3.31 per gallon, respectively. The Midwest price decreased less than 1 cent, remaining virtually unchanged at $3.26 per gallon.

Propane/propylene inventories rise

U.S. propane/propylene stocks increased by 1.6 million barrels last week to 59.6 million barrels as of July 9, 2021, 13.1 million barrels (18.0%) less than the five-year (2016-2020) average inventory levels for this same time of year. Midwest, East Coast, and Gulf Coast inventories increased by 0.7 million barrels, 0.6 million barrels, and 0.3 million barrels, respectively. Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged.

Brent crude oil exports imports pipelines WTI West Texas Intermediate EIA
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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

End of Article

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 

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