Light crude imports incentivized at US Gulf

OREANDA-NEWS. July 25, 2016. Free movement of US crude since December 2015, low prices and narrower spreads between domestic and international benchmarks are drawing light crude imports to the US Gulf coast.

Before the US crude export ban was lifted, domestic Light Louisiana Sweet (LLS) held a discount to Ice Brent, discouraging imports to the Gulf coast. LLS traded consistently at or below parity to Ice Brent from September–December 2015. But since December, LLS discounts to Ice Brent have narrowed, making imports occasionally attractive.

Crude imports to the US averaged 26°API in April 2016, the lightest since 2014 when imports averaged 25.8°API, and an increase from 25.5°API in 2015, according to the latest Energy Information Administration (EIA) data. For the first four months of 2016 Gulf coast imports above 26°API increased by 21mn bl over the same period a year ago, while heavier imports decreased by 20.79mn bl.

PADD 3 imports above 26° API climbed in March to 42.5mn bl, the highest level in 2016 to-date. Most came from Saudi Arabia, Iraq and Kuwait, all of which sell via official formula prices. But more than 5mn bl came from Nigeria and Norway.

Nigerian Bonny Light maintained an average premium of 53?/bl to North Sea Dated in March. The Nymex WTI/Ice Brent spread averaged \\$2.03/bl in March, which was the third-lowest spread in the five years through March. The spread narrowed further to 83?/bl in May and widened to \\$1.19/bl in June and \\$1.54/bl in July.

As foreign alternatives arrive on the Gulf coast, US producers are finding plenty of new homes for their crude, however. US producers exported 24.2mn bl of crude to countries other than Canada during the first four months of 2016, up by 13.8mn bl from the same time frame in 2015. Exports to Canada were previously permitted under US export restrictions.

Declining freight rates have also helped make US exports competitive. Freight rates for Panamax and Aframax tankers in the Caribbean fell in June to multi-year lows as Venezuelan crude output slumped. Caribbean-USGC Aframax freight fell 10pc to \\$6.02/t and Caribbean-USGC Panamax rate fell 13pc to \\$6.42/t earlier this month.

Venezuela, which has seen production decline amid a financial crisis, has taken advantage of cheap US crude to replace west African imports to blend with its domestic heavy oil. Peru has also begun importing US crude, and Colombian state-controlled Ecopetrol told Argus it will now consider buying US grades to run its refineries.

US producers will likely continue to look to overseas markets should light imports continue to pour into the Gulf coast. Unless arbitrage opportunities from the US to overseas markets close, it is unlikely that US producers will discount light crude to compete domestically. The trend should also solidify contract-based light crude from the Middle East to PADD 3.