The Impact of Keystone XL on Global Oil Markets

abarrelfullabarrelfull wrote on 09 Dec 2013 13:09
Tags: pipeline refinery usa

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Without a doubt, the single most important story in the world of oil, is the growing tight oil production in the USA. It has turned oil markets on its head, bringing change to areas of the world far from US shores.

One of the biggest impacts has been from the WTI / Brent price spread. Historically these two tracked each other very closely. Now it seems they are permanently divorced, as supply of domestic light crude outstrips the capacity of infrastructure to deal with it. Yet this could change very soon.

On January the 3rd, the first stage of the Keystone XL Pipeline Project will be completed. More than 800,000 barrels per day of new capacity will be available to take crude from Cushing, Oklahoma to the Gulf coast. Yet the spread is still at $13.60. Why? The pipeline has more than enough capacity, at least in the short term. Why is the market not buying it?

The story doing the rounds is that this is due to the ban on exports of crude oil from the USA. Whilst this may be true before January, I believe that WTI bears may be in for a surprise.

The first thing to note is that the USA still imports light sweet crude, mostly into the North East. I took the EIA Data and did a quick analysis. These countries produce crude that is predominantly light:

  • Algeria, Libya, Nigeria, Azerbaijan, Congo (Brazzaville), Kazakhstan, Netherlands and the United Kingdom

Between them, in the last six months (for which there is data) they exported 870,000 barrels per day of oil to the USA

As if this were not enough, there is one country for which the US export ban does not apply; Canada. Now I know what you are thinking, Canada is the single biggest source of crude imports for US refineries. So how can that matter? Well its all about the quality of the crude oil. Canada sells such grades as Heavy Hardisty, a low quality difficult to process crude. At the same time, it imports light crudes to feed its refineries in the East, which cannot access domestic supplies. Data on 2013 is not available, but NEB Data for 2012 shows that on average, Canada imported 675,000 barrels per day of light crude in that year.

When you combine US & Canadian light crude imports, it reaches 1.5 million barrels per day.

So when the new source of crude reaches the Gulf, after a short transition (which coincides with refinery maintenance season) we can expect to see a substantial closure in the WTI / Brent price spread. This is bad news for sellers of light crude elsewhere, who will be forced to find alternative customers. It will however be great news for Europe's hard pressed refiners, who will see less competition from US refiners, now that they have to pay the full price for their raw materials.

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