U.S. Oil Has One Fatal Weakness

U.S. crude oil production is again on the rise, and exports of American crude are smashing records.

But most of the U.S. oil production is light tight oil, and American exports—especially those of very light sweet crude—may hit a demand constraint next year, Bill Barnes, director of energy consultancy Pisgah Partners, writes in Petroleum Economist.

Oil production in the U.S. is currently expected to reach an all-time high at an average 9.9 million bpd next year. In recent weeks, U.S. crude oil exports beat records, and surpassed the 2-million-bpd mark for the first time ever in the week to October 27.

Last year, 51 percent of the 8.4 million bpd of crude oil produced in the Lower 48 States was light oil, or less dense oil with an API gravity of 40.1 or above, EIA data shows. The higher the API gravity, the lighter the oil. So far this year, much of the lower 48 states’ crude oil production had 30.1 or higher API gravity.

Due to the wide discount of the U.S. benchmark WTI to Brent in recent months, American exports have seen record-high levels.

Yet, according to Pisgah Partners’ Barnes, there are several demand and supply factors that may limit the buyers’ willingness to import extra light U.S. oil.

One is that Libya and Nigeria—the two members exempt from OPEC’s production cuts—have started to gradually recover their production that had been plagued by militant and civil strife last year. And they are exporting light sweet crude oil varieties to refiners.

Also, consumption of various oil products outside the U.S. “argue for processing middle-gravity crudes such as Arab Light, Iranian Light and Russian Urals, rather than extra-light barrels such as 48°API gravity Eagle Ford,” Barnes said.

Import data about U.S. crude sales in some Asian market suggests that Japan and India, for example, aren’t looking for extra light barrels from the U.S. Japan’s crude oil imports from the U.S. have a weighted average API gravity 36.9, Barnes writes, quoting data by the Petroleum Association of Japan. India, for its part, is said to have recently imported WTI and Southern Green Canyon, whose API gravity is 40 and 28, respectively.

With exports of the less light varieties, the extra light tight oil barrels are either entering the U.S. refinery system or storage tanks, Barnes argues. Since refineries have technical limits to processing the extra light oil, many barrels may end up in storage. U.S. oil inventories have been growing ‘lighter’ while medium and heavier grades are exported, Barnes says, quoting analysts.

Although refineries will adapt to process more of the extra light U.S. oil in the medium term, in the short term the market may be limited in its capability to digest higher volumes of the very light U.S. varieties. Next year the extra light crude market will continue to see a glut, resulting in a narrower sweet-to-sour crude oil spread and a persistent WTI discount to Brent, says Barnes.

By Tsvetana Paraskova for Oilprice.com