Reduced OPEC oil exports to the North American market are narrowing
an important price spread between light and heavy crude blends,
pressuring margins for U.S. refiners on the Gulf Coast with specialized
conversion capacity, according to Fitch Ratings. At the same time,
Canadian exporters of heavy crude benefit from the tighter spreads in
the form of higher realizations for their discounted grades of heavy
oil.
OPEC members have begun to target reductions in exports to the U.S.
in an effort to cut into ample U.S. crude inventories, which are
monitored closely as a barometer of the global oil supply and demand
balance. The U.S. inventories are also seen as important in setting
global prices insofar as U.S. shale has emerged as the most important
source of short-term supply in the oil market. On July 26, the U.S.
Energy Information Administration (EIA) reported that inventories stood
at 483 million barrels, down from 532 million barrels in April. This
occurred despite U.S. shale production ramping up to 9.4 million barrels
per day (mbpd) compared with 8.8 mbpd at YE16.
As supplies of lower priced, heavier crude blends with higher sulfur
content exported by OPEC have waned, the key price differential between
benchmark light and heavy grade oil in the U.S. has narrowed
considerably. This has cut into Gulf Coast refiners’ profit margins
during 2Q17. Many Gulf Coast refiners, including Valero Energy, CITGO
and Phillips 66, have considerable coking capacity to convert heavier
crude oil into gasoline and other refined products. Those refiners
benefit from a wide spread between higher priced West Texas Intermediate
(WTI) and Western Canadian Select (WCS), the heavy crude benchmark in
Canada.
That spread has tightened over the past few months from historical
averages in the $15 per-barrel range to an average of $9.80 per barrel
in 2Q17. On a percentage basis, the WCS discount below WTI has fallen to
approximately 20% versus historical averages of 25%. Producers in
Canada’s Oil Sands region, including Cenovus Energy and MEG, benefited
in 2Q17 from contracted light-heavy spreads as realized margins
increased due to the reduced WCS discount.
We do not expect very tight light-heavy crude price spreads to
persist over the long term given pending increases in heavy Canadian Oil
Sands output. The Fort Hills project (194,000 bpd bitumen) is expected
online later this year. Increased pipeline capacity from Canada into the
U.S. should also contribute to an easing of spreads.
One additional near-term wrinkle in the outlook for heavy crude
supply in the North American market is the potential cutoff of
Venezuelan oil exports to the U.S. as a result of newly imposed
sanctions. According to EIA data, U.S. refiners are major buyers of
Venezuela’s heavy high sulfur crude oil. Any move by the Trump
administration to block imports from Venezuela could lead to a renewed
search for heavy crude supply in the Gulf, likely tightening the
light-heavy spread even more.
Source: Fitch Ratings
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