Sud­denly, the U.S. is drip­ping with im­ported oil

Now that ex­ports are al­lowed, the in­dus­try is hoard­ing for­eign crude “Putting away oil is one of the few risk-free plays in the world”

Bloomberg Businessweek (Asia) - - CONTENT - −Matthew Philips

In the three months since the U.S. lifted its 40-year ban on crude oil ex­ports, a cu­ri­ous thing has hap­pened. Rather than flood­ing global mar­kets, U.S. crude ship­ments to for­eign buy­ers have stalled. At the same time, im­ports into the U.S. jumped to a three-year high in what looks to be a re­ver­sal of a years­long de­cline in the amount of for­eign crude

brought into the Amer­i­can mar­ket.

As of March 25, the four-week av­er­age of im­ports was run­ning at 7.9 mil­lion bar­rels a day, 9.8 per­cent higher than the year be­fore. “That’s not a one-week blip,” says Tim Evans, an en­ergy an­a­lyst at Citi Futures. “We’re see­ing a con­sis­tent pat­tern.”

U.S. pro­duc­ers, who reaped the ben­e­fits of the shale rev­o­lu­tion, no longer en­joy a steep price ad­van­tage over for­eign ri­vals in sell­ing to do­mes­tic re­fin­ers. Pro­duc­tion has fallen by about 600,000 bar­rels a day from its peak of 9.6 mil­lion in 2015. Now re­finer­ies are buy­ing for­eign oil to re­place the lost U.S. out­put—and, along with traders, are stor­ing much of the less-ex­pen­sive im­ported oil to sell when prices rise.

Dur­ing the early years of the U.S. shale boom, the millions of bar­rels of light, sweet crude had one big prob­lem: no af­ford­able ac­cess to re­fin­ers on the coasts of Texas and Louisiana. To tap into the cheaper oil pool­ing in Ok­la­homa, pipe­lines that used to bring im­ported oil up from the Gulf were re­versed to take shale oil down to the coast. Re­fin­ers in Philadel­phia and New Jersey also be­gan buy­ing North Dakota crude in­stead of for­eign oil, mov­ing it by train across the coun­try. By Oc­to­ber 2014, U.S. im­ports had fallen by about 40 per­cent from a high in 2006.

An­a­lysts say that West Texas In­ter­me­di­ate crude has to be $3 to $5 cheaper than im­ported oil to pay for those pipeline and trans­porta­tion costs. From 2011 to 2014, U.S. oil was on av­er­age $12.61 cheaper than equiv­a­lent for­eign oil. The dis­count slowly nar­rowed as pipeline projects were com­pleted and U.S. crude be­gan to flow more freely from the mid­dle of the coun­try down to the Gulf Coast. A week be­fore the Se­nate ap­proved lift­ing the ex­port ban on Dec. 18, WTI traded around $3 be­low Brent. Over the next month, the dis­count dis­ap­peared, and, for the first time in six years, WTI traded at a premium to Brent for a few days in Jan­uary. WTI is now less than a dol­lar cheaper than for­eign bar­rels avail­able on the Gulf Coast.

So re­finer­ies along the coasts are choos­ing to buy im­ports in­stead of WTI. One of the big­gest win­ners is Nige­ria, which is re­gain­ing lost mar­ket share. Im­ports from Nige­ria surged to 559,000 bar­rels a day in mid-March, com­pared with an av­er­age of 52,000 for all of 2015. Re­fin­ers are also tak­ing more heavy oil from Mex­ico and Venezuela. Not only is it about $9 a bar­rel cheaper than WTI, it’s also what U.S. re­finer­ies pre­fer to han­dle.

The irony of the shale boom, and all the light crude it un­locked, is that it came just as U.S. re­fin­ers were spend­ing bil­lions to process heavy oil. “In the­ory, there was al­ways go­ing to be a link­age be­tween free­ing up U.S. bar­rels and re­plac­ing them with for­eign crude that U.S. re­fin­ers are bet­ter suited to run,” says Kevin Book, manag­ing di­rec­tor at ClearView En­ergy Part­ners.

For some of the weak­est U.S. pro­duc­ers with the highest costs, lift­ing the ban didn’t mat­ter be­cause they can’t com­pete on the global mar­ket, says Abudi Zein, co-founder of Clip­perData, which uses cus­toms data and ship­track­ing in­for­ma­tion to es­ti­mate global oil flows. For U.S. pro­duc­ers with the highest costs, “they’ll never be able to ex­port be­cause all of a sud­den they’re com­pet­ing with Saudi Ara­bia and Iraq.”

The U.S. is hoard­ing a lot of the im­ported oil. As of March 25, U.S. com­mer­cial crude in­ven­to­ries hit 534 mil­lion bar­rels. That’s near the all­time high in 1929, when U.S. com­mer­cial stor­age hit 545 mil­lion bar­rels, as huge oil finds co­in­cided with the be­gin­ning of the Great De­pres­sion.

Today, with oil so cheap, pro­duc­ers and traders are opt­ing to wait for prices to rise in­stead of sell­ing, es­pe­cially with the futures mar­ket sig­nal­ing that oil prices will rise. Traders can lock in those prices by tak­ing out a con­tract for de­liv­ery a few months down the road. A bar­rel of WTI for de­liv­ery in Oc­to­ber is about $3.50 higher than the cur­rent price of about $39. That premium has dipped in re­cent months, but it’s still enough to pay for in­surance and stor­age costs—with money left over.

“Putting away oil is one of the few risk-free plays in the world right now,” says Philip Ver­leger, an en­ergy con­sul­tant and for­mer di­rec­tor of the of­fice of en­ergy pol­icy at the Depart­ment of the Trea­sury. Fears of a lack of stor­age space for oil haven’t come true. As of Septem­ber 2015, the U.S. had 551 mil­lion bar­rels of work­ing oil-stor­age ca­pac­ity, 50 mil­lion more than it did two years be­fore, ac­cord­ing to gov­ern­ment fig­ures. Gen­scape, an oil-mar­ket-sur­veil­lance com­pany, es­ti­mates that in the Mid­west and the area along the Gulf Coast, the pace of con­struc­tion has in­creased since Septem­ber to about 574,000 bar­rels of new stor­age—big enough to hold a 747—a week.

The con­struc­tion has helped keep leas­ing costs rel­a­tively low, says Ernie Barsamian, a prin­ci­pal at The Tank Tiger, a tank-stor­age bro­ker. Av­er­age prices for a one-year lease of a stor­age tank run about 60¢ to 70¢ per bar­rel a month, he says. Barsamian es­ti­mates

it costs about $40 to $50 a bar­rel to build a stor­age tank and that com­pa­nies that own them can make their money back in five years or so.

As long as futures prices re­main higher than cur­rent ones, the in­cen­tive will re­main to pump oil and store it. That leaves the U.S. stuck in a strange pat­tern where “the higher in­ven­to­ries go, the more down­ward pres­sure that puts on near-term prices, which only in­creases the in­cen­tive to store it,” says Citi Futures’ Evans. The only way to break that cy­cle is for in­ter­est rates to rise, says Ver­leger, which would in­crease the fi­nanc­ing costs to build stor­age tanks. “As long as money is cheap, it’ll make sense to build stor­age tanks in the U.S.”

The bot­tom line U.S. oil pro­duc­tion has fallen by about 600,000 bar­rels a day since peak­ing in 2015, and im­ports have filled the gap.

Crude oil stor­agetanks un­der con­struc­tion in Ned­er­land, Texas

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