Despite narrowing Brent–WTI spread and lower production, U.S. crude oil exports remain high
Following the rapid growth of U.S. crude oil production since 2010, the U.S. government lifted restrictions on crude oil exports in December 2015. Before the restrictions were lifted, exports were less than 0.5 million barrels per day (b/d), but subsequent U.S. production growth caused price spreads between international (Brent) and domestic (West Texas Intermediate, or WTI) crude oil benchmark prices to widen. WTI averaged $10 per barrel (b) less than Brent from 2011 to 2014. Since the policy change in 2015, U.S. crude oil exports have increased significantly and have averaged more than 3.0 million b/d since 2019, despite narrowing price spreads, significant price drops, reduced demand, and less production since early 2020, when the U.S. market began to react to the COVID-19 pandemic. Weekly export data from our Weekly Petroleum Status Report show a slight growth trend in crude oil exports since June 2021. As of the week of July 9, 2021, U.S. crude oil exports averaged 3.51 million b/d, and Brent and WTI spot prices averaged $76.13/b and $73.35/b, respectively (Figure 1).
Since 2015, U.S. crude oil export infrastructure, including pipelines and terminals, has expanded rapidly in the Texas Gulf Coast, particularly at the ports in Corpus Christi and Houston. As a result of this infrastructure expansion and a significant increase in domestic production, crude oil exports grew rapidly when benchmark prices remained above $50/b in 2018 and 2019, and they declined only moderately when the market dropped sharply in 2020. Between March 20 and June 19, 2020, four-week average U.S. crude oil exports declined about 31% and refinery inputs declined 13%. Crude oil exports declined more than refinery inputs in the same time period. In early 2021, both Brent and WTI prices increased to 2019 levels, and the price spread between Brent and WTI had narrowed to less than $2/b as of June 25 from about $8/b at the end of 2019. Four-week average crude oil exports had increased to 3.5 million b/d during the same period. In addition, WTI prices higher than $70 will contribute to an increase in U.S. crude oil production, which in turn will likely contribute to growth in U.S. crude oil exports.
The growth in U.S. crude oil exports in the first half of 2021 has been predominantly sourced from oil produced in the Permian, Eagle Ford, and Bakken regions, but crude oil exports also increasingly contain Federal Offshore Gulf of Mexico crude oils such as Mars and Southern Green Canyon, based on export data from ClipperData (Figure 2). Because the Permian and Eagle Ford regions are close to the Texas Gulf Coast, crude oil produced in these regions is usually exported from the Gulf Coast region (PADD 3). Prior to pipeline networks expanding to connect to the shale regions in North Dakota and Texas, rail transportation was an important means of delivering crude oil, mainly from the Bakken region in the Midwest (PADD 2), to refineries and crude oil export terminals.
Pipeline development continues to play an important role in the growth of U.S. crude oil exports. Historically, U.S. refiners imported crude oil to the Gulf Coast by marine vessels and then transported some of the imported crude oil to the Midwest through pipeline systems such as Seaway and Capline, which flowed north from the Gulf Coast to the Midwest.
With rapidly increasing crude oil production, the demand to move imported crude oil from the Gulf Coast to the Midwest declined. As a result, the volume of crude oil moving through the Seaway pipeline dropped, and the pipeline was reversed in June 2012 to flow south and transport growing domestic crude oil production from the Bakken to the Gulf Coast. The Houma-to-Houston (Ho-Ho) pipeline, renamed the Zydeco Oil Pipeline in 2014, was also reversed in December 2013 to transport crude oil from the Texas Gulf Coast to Louisiana Gulf Coast primarily for refinery processing.
Such structural changes diminished the flow of crude oil from the Gulf Coast to the Midwest and contributed to the rapid increase of crude oil exports (Figure 3). Most U.S. crude oil exports leave the country from Texas ports, but some leave from Louisiana ports. Based on estimates from ClipperData, crude oil exports from Texas have been as high as 1.9 million b/d at Corpus Christi in June 2021 and 0.9 million b/d at Houston in May 2019. In Louisiana, they have also been as high as 0.4 million b/d at Morgan City in April 2021 and 0.3 million barrels at Baton Rouge in July 2018.
Crude oil exports could further expand as more infrastructure is modified. Recently, Marathon Pipeline (MPLX) announced Capline’s reversal proposal. The total Capline pipeline capacity of more than 1 million b/d from the Louisiana Gulf Coast to the Midwest has been idled for several years as domestic crude oil and crude oil from Canada displaced imported light crude oil. In the proposal, light crude oil produced in Bakken and heavy crude oil from Canada will be transported from Patoka, Illinois, to St. James, Louisiana, via the reversed Capline pipeline. The initial reversal project planned for light domestic oil to be transported from Cushing, Oklahoma, to Memphis, Tennessee, via the existing Diamond pipeline through an extension and a newly constructed connection to Capline (Byhalia Connection). The pipeline would then travel from Memphis, Tennessee, to St. James, Louisiana, via the reversed Capline (Figure 4). On July 2, 2021, however, project developers Plains All American and Valero announced they were canceling the Byhalia Connection project, which our pipeline database had expected to be in operation by the first quarter of 2022.
The Memphis Valero refinery owns an existing pipeline, the Collierville pipeline (not illustrated in Figure 4), connecting the refinery at Memphis and a terminal of Capline pipeline in Collierville, Tennessee. The Byhalia connection was proposed as an expansion of the Collierville pipeline. Because the Byhalia project was canceled, the future of the idling Collierville pipeline is uncertain. However, the pipeline could be an option to bridge not only the Memphis Valero refinery with Capline to source Canada’s and the Bakken’s crude oil but also allow WTI crude oil to flow to the Gulf Coast on the Capline pipeline.
Nonetheless, if Capline is fully reversed, it could transport light crude oil from the Bakken region and Canada to Louisiana for refinery processing and exports. In addition to increasing U.S. export capacity, such a reversal may continue to contribute to significant changes in the U.S. petroleum industry, particularly in heavy oil imports from Canada to the Gulf Coast, refinery inputs in the Gulf Coast and Midwest, and crude oil exports from the Gulf Coast.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price increased more than 1 cent to $3.13 per gallon on July 12, 94 cents higher than the same time last year. The Rocky Mountain price increased more than 5 cents to $3.49 per gallon, the Gulf Coast price increased 3 cents to $2.83 per gallon, the West Coast price increased nearly 3 cents to $3.87 per gallon, and the East Coast price increased nearly 1 cent, remaining virtually unchanged at $3.01 per gallon. The Midwest price decreased less than 1 cent to $3.02 per gallon.
The U.S. average diesel fuel price increased less than 1 cent to $3.34 per gallon on July 12, 90 cents higher than a year ago. The Rocky Mountain price increased nearly 8 cents to $3.59 per gallon, the West Coast price increased nearly 1 cent to $3.91 per gallon, and the Gulf Coast and East Coast prices each increased nearly 1 cent, remaining virtually unchanged at $3.08 per gallon and $3.31 per gallon, respectively. The Midwest price decreased less than 1 cent, remaining virtually unchanged at $3.26 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 1.6 million barrels last week to 59.6 million barrels as of July 9, 2021, 13.1 million barrels (18.0%) less than the five-year (2016-2020) average inventory levels for this same time of year. Midwest, East Coast, and Gulf Coast inventories increased by 0.7 million barrels, 0.6 million barrels, and 0.3 million barrels, respectively. Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.