US adaptation to light sweet may spur imports

OREANDA-NEWS. September 07, 2015. Rising US demand for light sweet crude and a declining supply could lead to more light sweet imports to the US.

Demand for light sweet crude is increasing as refiners and midstream companies adapt to the lighter domestic crude slate that's accompanied the current US production boom by building infrastructure designed to process it. The increased demand for light sweet crude has reduced the supply available to use for blending into Louisiana Light Sweet (LLS), a key refining blend, opening up the possibility of light sweet imports returning to the US.

The most recent project for processing light crude is Buckeye's 50,000 b/d Corpus Christi splitter, slated to begin operations this quarter.

Kinder Morgan started operations at its second 50,000 b/d splitter in the Houston Ship Channel in July, following the March startup of its first 50,000 b/d unit.

Several refiners have also made changes that enable them to process increasing amounts of domestic light sweet production.

Marathon began operations on a 35,000 b/d splitter at its 240,000 b/d Catlettsburg, Kentucky, refinery in June, following the December start of a 25,000 b/d splitter at its 78,000 b/d refinery in Canton, Ohio. Even though Marathon is able to take advantage of production from the Utica shale in Ohio, rather than relying on crude from Texas, it still impacts the overall light crude balance since Utica is used for LLS blending.

The demand for light sweet crude in the US should increase moving forward as several projects are currently under construction.

ExxonMobil will add 20,000 b/d of crude processing capacity and improve light crude handling at its 348,000 b/d refinery in Beaumont, Texas. Valero has undertaken projects that increase the light crude distillation, but not the overall refining capacity, of its 90,000 b/d Houston and 200,000 b/d Corpus Christi, Texas, refineries.

Flint Hills Resources has a similar project under construction at its 260,000 b/d refinery in Corpus Christi. Phillips 66 has also studied a light crude tower to increase similar capacity at its 250,000 b/d Alliance refinery in Belle Chasse, Louisiana.

Condensate exports also increased demand for light sweet crude. A record high of 132,000 b/d left the US Gulf in June, the latest month for which government data is available. Upcoming crude oil swaps with Mexico will further increase the amount of light crude exported from the US Gulf.

US crude oil production is declining owing to the collapse in prices, contributing to a tight market. Production in Texas was 3.46mn b/d in June, lower by 184,000 b/d from the March 2015 peak, and below May's level by 66,000 b/d. Prior to September 2014, when Texas production fell by 10,000 b/d from August, production increased every month since March 2011. Shale production is unlikely to increase in the near future, further increasing the likelihood of light sweet imports.

Following the surge in lighter domestic crude supply, LLS tended to adjust to the spread between Nymex WTI and Ice Brent such that imports were more expensive than domestic supplies. But, as supply and demand move apart, LLS may be unable to sustain this role.

LLS has closed in on Ice Brent, ranging from a discount of about \\$1/bl to a premium of about 20?/bl to Ice Brent during October trade, to date. If LLS fails to stay at a discount to Ice Brent, market participants will begin looking abroad to satisfy demand for light sweet crude.

The value of LLS compared to medium sour Mars, or the sweet-sour spread at the US Gulf coast, has also been on the rise, indicating a reduction in the availability of light sweet crude relative to heavier grades.

At the height of the shale boom, the spread tended to move between \\$3/bl and \\$4/bl, but more recently, it has been nearing \\$5/bl. The typical premium of LLS to Mars was approximately \\$5/bl prior to the growth in light sweet production.