The increase in domestic crude oil production is widely reported to have flipped US import requirements on their heads. While this holds true for light/sweet crude oil producers, there appears to be even more dependence on heavier/sourer crude oil suppliers in spite of the shale oil boom, reports Poten & Partners in their recent 'Poten Tanker Opinion'.
With traditional light/sweet suppliers like West Africa and Europe out of the fray, it is easier to observe the net results of forces that dictate from where the US sources its imports. Investments and long‐ term relationships will support long‐haul trade to the US, benefitting VLCC ton‐mile demand. However, Canada’s position as a supplier to the US Gulf Coast presents looming competition to such seaborne imports.
A look at the pricing differentials between Arab Medium crude oil and other grades, identifies the relative price strength of Saudi‐sourced barrels to US and Asian end‐users.
While baseline supply commitments are generally stable and established through term sales contracts, price discounts can indicate where above‐the‐ baseline crude oil production may be marketed.
Since the end of 2011, Arab Medium price discounts have tended to favor the US market (when the differential is below $0). This was likely the result of two factors: required crude oil stocking in anticipation of Aramco’s joint‐venture Motiva refinery Q1 2012 expansion and the calibration of US domestic crude oil prices with the introduction of new and competitive grades.
Transportation inefficiencies and physical constraints had thus far restricted the flow of domestic crude oil to thirsty Gulf Coast refiners causing these grades to trade at a steep discount compared to seaborne alternatives.
Although there is, what appears to be, continued improvement in Canadian and US crude oil transportation efficiency (pipelines, waterborne trade, etc.) improving the flow of local crude oil to the US Gulf coast, until new projects come to fruition, demand for incremental Saudi barrels could increase.
The strengthening of ties between Caribbean producers, such as Venezuela and Colombia, and China has limited supplies of short‐haul heavy/sour crude oil in the US Gulf. As a result, Saudi Arabia has become a larger percentage of the overall picture. Saudi Arabian crude oil now accounts for approximately 25% of total imports, which marks a significant increase from the 9‐11% range that was experienced as recently as 2010.
Further supporting VLCC ton‐mile demand, it is likely that the Caribbean to Far East trade flow will only strengthen as Chinese credit offered in exchange for oil supplies has the makings of a long‐term symbiotic relationship for many producer nations. In fact, recent news cites that Chinese companies are expressing interest in becoming producers in Mexico, as the country works to opens its doors to foreign participants.
In the future, the US Gulf could require an arguably higher proportion of heavy crude to mix with domestically‐produced light inputs. Although Canada will undoubtedly play a larger role in the supply mix over time, dwindling Caribbean supplies of heavy/sour crude oil will likely strengthen the US’s reliance on Saudi Arabian crude oil. With the US Gulf Coast expected to become more dependent on Saudi Arabian crude oil, more westbound cargoes could be afoot.
Source: Poten & Partners