Short-term benefits in start of U.S. oil exports

Beleaguered Canadian crude producers may get a shortterm boost from Washington, if U. S. lawmakers agree to lift a 40- year ban on American crude oil exports. But over the long- term it could choke off Canadian crude supplies in international markets, according to analysts.

The crude oil measures are part of a US$1.1 trillion spending bill being negotiated by Republicans and Democrats to avoid a U. S. government shutdown. Senate Democratic leader Harry Reid, who is opposed to lifting the ban, said the dispute was the last remaining obstacle to agreement on the spending bill. Congressional leaders were expected to unveil the bill later Tuesday for a possible vote on Thursday.

Current government funding runs out at the end of the day Wednesday, and a shortterm extension will be needed to keep the government operating.

“It’s still not a done deal, but we have never been closer,” said Michael Wojciechowski, vice- president Americas refining research at Wood Mackenzie, who believes there are many obstacles to a deal being signed.

Oil prices rose nearly three per cent partially on the news that the deal would lift North America- focused West Texas Intermediate prices, and bring them closer to the international Brent crude benchmark, which measures two-thirds of the world’s crude oil supplies.

“Both Western Canada Select heavy crude and light crudes in Edmonton and synthetic crude would edge up a little because WTI would be edging up more toward international levels,” said Patricia Mohr, vice-president, economics, and commodity market specialist at Scotiabank. “Brent may come down a bit too, but net-net crude prices would rise for North America.”

The spread between WTI and Brent narrowed to its lowest level in a year Tuesday to just over a US$1 per barrel, in contrast to the US$4.80 per barrel average premium Brent has enjoyed against WTI this year. WCS benchmark rose 5.26 per cent to US$23.80 and Syncrude sweet blend crude shot up 4.54 per cent to US$37.75 per barrel Tuesday, Bloomberg data shows.

U.S. light oil from its prolific shale basins will likely be the first to be exported if the ban is lifted, with Canadian oilsands producers remaining the grade of choice for U.S. Gulf Coast refiners who have reconfigured their complexes to process heavier blends.

Led by the oilsands, Canadian crude makes up by far the largest imports to the U.S., accounting for 3.26 million barrels per day of oil, or 45 per cent of U.S. crude oil imports.

Over time, though, there are fears Gulf Coast refiners may eventually revisit their procurement strategy, especially if heavy oil stops trading at a discount to light oil.

“If that light- heavy oil differentials tighten, you would stop seeing the incentive to buy the heavy barrel,” Wojciechowski says.

Martin King, vice-president of institutional research at Calgary-based FirstEnergy Capital Corp., believes Canadian producers would see greater competition if the U.S. export ban is scrapped.

“There’s still market- share capture opportunity for Canadian crude in the U.S., and certainly an opportunity for Canada to capture more international market through re-exports of Canadian crude going through the Gulf Coast,” King said. “That may get choked off a bit.”

Canadian producers such as Cenovus Energy Inc. and Suncor Energy Inc., apart from BP and Royal Dutch Shell PLC, have begun shipping mostly light Canadian crude to international markets via the U.S. Gulf Coast, but that channel could close for Canada if international importers seek larger quantities from the U.S., King said.

The arrival of U.S. crude into the international market may also eventually challenge OPEC producers who have been actively driving down the prices by raising output to squeeze out high-cost producers.

OPEC Secretary- General Abdalla El-Badri said Tuesday any removal of the U.S. export curbs won’t affect oil prices.

But scrapping the U.S. export ban would help North American crudes to fetch market prices and integrate the U.S. Oil and gas market with the rest of the world.

“Instead of having an obstruction in place of having all this supply that’s not getting to the rest of the world, we will see proper flow of crude,” said King. “It’s not more supply but it takes that supply and moves it elsewhere.”

However, Wojciechowski warns that after a “short-term exuberance” in prices, markets will consider the sobering view that U. S. oil exports will be in the form of a “trickle” rather than a flood over time.