Foreign Markets For U.S. Oil Products

As we have seen the lift in the export ban on U.S. petroleum, one interesting question arises: with Saudi Arabia and others already flooding Asian markets, and Russia flooding European markets, where can U.S. products go? For those of you that read this week’s article about the Updated EIA Annual outlook, you know that at some point, the U.S. is predicted to be a net energy exporter. But to where?

Interestingly, Canada offers one solution. As many of you know, Canada is a large exporter of low grade crude referred to as heavy crude oil as it comes primarily from Canada’s Oil Sands deposit. The consistency is incredibly thick (even thicker than heavy crude – which has a consistency of syrup). Heavy oil makes up about 56% of Canada’s convention oil exports. To deal with the issue, some oil production is made into synthetic crude, while other heavy oil is blended with lighter oil to increase the flow of the bended product. Condensates are commonly used.

As Canada’s heavy oil and bitumen production grew over the years, producers’ use of condensate grew disproportionately to the domestic supply of condensates. In 2003 Alberta had a 5,000 barrel per day surplus of domestic condensate supply and at the end of 2015 that turned into a 370,700 barrel per day deficit. The U.S. has been filling Canada’s condensate gap with light oil production from US shale formations, specifically in the Eagle Ford. Without U.S. imports of condensate, 1.2 million barrels of heavy oil and bitumen would be land locked in Canada and unable be moved through pipelines due to its viscosity.

            One of the more interesting question is where will U.S. Natural Gas go? As can be seen from world pricing, the United States has abundant natural gas – where it trades substantially cheaper than in other parts of the world. For example, in the EU, December 2016, natural gas was trading at an average of $5.50. In the U.S., on December 30, 2016, it closed at $3.724. A substantial difference.

Yet, LNG exports from the U.S. have yet to pick up to the European markets. According to a report issued on December 27, 2016, US exports of natural gas to European markets have had a negligible effect thus far. (). Despite predictions that US Nat Gas would flood European markets, just three cargoes of US Nat Gas have landed in Europe thus far. Two were “test” cargoes bound for the Iberian Peninsula, and one landed in Italy to be stored for periods of unexpected peak demands.

Now some of this may be shipping limitations and other issues that may eventually resolve. However, the prospect of rapid U.S. exports did not materialize.

Nevertheless, U.S. refiners are also finding a boom in Mexico for exporting refined products. As some of you might know, the Mexican government recently increased gas prices as much as 22% in some areas and announced plans to stop subsidizing gas and to let the market drive the price. This lead to some riots and some shifting policies in response to what was a not so minor political uprising.

However, even before this critical announcement less than a few weeks ago, Mexico was becoming a prime trade partner and customer for U.S. gasoline. According to reports, the fuel trade could top a million barrels per day (bpd) at times in 2017 as Mexico becomes increasingly dependent on the United States for strategic energy supplies and providing business worth more than $15 billion a year to refiners. This has led to a rapid reversal in energy trade between the two countries. In 2016, crude exporter Mexico will be a net oil importer from the United States for the first time as shipments of refined fuel heading south outnumber shipments of crude to the north, according to the U.S. Energy Information Administration (EIA).

As the U.S. moves into the swing producer role, and continues through better technology and higher well production rates to drive down the cost per barrel, energy trading may become more and more important to our economy. We frequently consider the possibility of petroleum exports, but we also frequently overlook refined products, and now emerging, natural gas. Right now, the U.S. is in fourth place in terms of proven natural gas reserves, behind only Russia, Iran, Qatar, and Turkmenistan with an estimated 5% of the World’s total available natural gas. Given our relatively cheap cost of production, that bodes well for the United States.

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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Ty’s Take 01-13-17
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