Last week we held the third webinar from our “Data in Action” webinar series with Platts, a leading global provider of market news and benchmark price assessments for those in energy and commodity markets. Platts has been independently and impartially assessing oil markets since 1909, and with the recent crude oil developments in the U.S. we thought it would be interesting to take a closer look at the evolving trends and their effect on global and U.S. crude markets by analyzing Platts data through ZEMA. ZEMA provides a streamlined data collection service, and offers clients the ability to perform complex analysis of market data which can be easily integrated with third-party systems.

Bruce Colquhoun, Business Development Manager at ZE, teamed up with Esa Ramasamey, Platts Global Director of Strategic Oil Market Development, to give an outline of how the continuing shale gas boom has changed the direction of the U.S.’s role in the global oil markets. What was once a major consumer of crude oil and refined products has now become the third largest crude oil producer, after Russia and Saudi Arabia, and one of the largest exporters of refined products. For the first time in almost 20 years, U.S. crude oil imports have fallen to lower levels than that being produced.

The Circuit Breaker
In order to demonstrate the changes the U.S. has witnessed, we first looked at the ICE Brent-NYMEX WTI spread (see figure 1). This spread gives a strong indication as to how much oil the U.S. can viably produce. When the Brent-WTI spread widens, that spread pays for the costs of transporting shale oil from U.S. oil fields into the various U.S. refining centers. As that spread narrowed, demand for domestic crudes fell sharply, while imports rose, hence the term “circuit breaker” when describing the effect this spread has on U.S. domestic production.

Figure 1. ICE Brent – NYMEX WTI Spread from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

Figure 1. ICE Brent – NYMEX WTI Spread from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

It is interesting to note that when the Brent-WTI spread narrowed (see figure 2), there was no significant change in Bakken’s differential at Clearbrook, one of the assessment points for Bakken;  further, refiners were not incentivized to buy from Bakken, resulting in East coast refiners reducing their purchases of Bakken crude and seeking cheaper imports.

Figure 2. Bakken vs. Brent-WTI from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

Figure 2. Bakken vs. Brent-WTI from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

Houston vs Cushing as the U.S. Pricing Center
Another spread we looked at was that of WTI-Midland vs. Brent-WTI (see figure 3). Until last November, WTI Midland was trading $40 below ICE Brent, due to light demand and various geographical constraints. However the reversal of the Longhorn pipeline by Magellan allowed WTI Midland to be shipped through the pipeline to the Houston market, resulting in a more stabilized market. This prompted the question as to whether such a change in market structure would give rise to Houston becoming the pricing center for U.S. crude oil, or if Cushing would remain the pricing center. With Houston being the center of Gulf refining, and having access to shipments of crude, it would make it an important reference point going forward. Only time will tell what NYMEX has in store.

Figure 3. WTI Midland vs. Brent-WTI Spread from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

Figure 3. WTI Midland vs. Brent-WTI Spread from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

Brent-WTI Spread Adds Pressure to LLS and MARS
Another recent development we looked at was the impact that the changing Brent-WTI spread is having on Mars, an imported medium sour crude, and LLS, a light sweet crude. Both of these imported crudes were trading at a premium to Brent-WTI until July, when they began to act differently and de-link themselves from the Brent market (see figure 4). One reason offered is the turnaround in Gulf Coast refineries. However, as we can see in the Platts data, even when Gulf Coast refineries undertook turnarounds, both Mars and LLS were still trading at a premium.
Another reason could be the logistical changes to how crudes are being shipped out. The reversal of the Houma to Houston pipeline has made it uneconomical to move LLS to Houston and Nederland refiners. Mars and LLS have also felt downward pressure from the flood of Bakken and Eagle Ford Shale crudes into the Houston area, as well as the arrival of Canadian crudes into the Gulf Coast.

Figure 4. LLS, Mars, and Brent-WTI Spreads from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

Figure 4. LLS, Mars, and Brent-WTI Spreads from July 2010 to November 2013. Graph created in ZEMA using Platts Crude data.

Conclusion
According to Ramasamy, one of the first production centers to suffer as a result of current trends in U.S. markets is the Latin American market. Latin American producers are being forced to seek new markets in Singapore, China and India. And it’s not just this market. The U.S. shale gas boom has caused Middle Eastern producers to take stock of their situation. Producers in Saudi Arabia, Kuwait and Iraq currently supply 2 million barrels per day of crude to the Gulf Coast and other parts of the U.S., and if U.S. production levels are maintained, it may possibly push back these Middle Eastern crudes coming into the country.
Another important aspect to understand is the limitation of U.S. domestic crude exports. Currently, U.S. crudes cannot go beyond Canada, and therefore cannot reflect international developments. Ramasamy is unconvinced that the U.S. will be producing 10 million barrels per day under the current constraints. In order to maintain these developments in the market, the price of oil will need to remain at current levels – $90 for WTI and $110 for Brent. Were the markets to collapse by $20-$30 dollars, there would surely be a change in perspective.

To watch the webinar recording, click here.

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