US tight oil: Too light, too sweet
International buyers' appetite may start to wane in 2018
US light tight oil output is transforming world oil markets. After falling during the 2015 oil price crash, total American production - of which shale is now a major source - surged back onto markets, and the
Energy Information Administration (EIA) expects output to rise another 0.5m barrels a day in 2018, to a record 9.9m b/d. Much of this new production is finding its way onto global markets, and exports now regularly run over 1m b/d.
But can there be too much of a good thing? Specifically, with
Opec's light sweet crude exporters Libya and Nigeria staggering back from extended production outages, and big Persian Gulf producers tightening availabilities of middle-gravity sour crudes, is there a "demand limit" to the volumes of very light sweet crude now produced in the US? Several factors suggest that there is, and that the market is already pricing it in.
First, while the US runs on light products, with gasoline making up nearly 48% of the demand barrel, the rest of the world has a stronger taste for middle distillates. The global demand barrel is 36% middle distillates and only 32% gasoline. European and Eurasian middle-distillate demand is an enormous 49.3% of the barrel, according to the latest BP Statistical Review. Middle-distillate demand is widely expected to grow as worldwide trucking volumes increase and maritime fuels begin a major shift to marine gasoil from heavy fuel oil so they comply with new sulphur-emissions limits. Product consumption patterns outside the US argue for processing middle-gravity crudes such as Arab Light, Iranian Light and Russian Urals, rather than extra-light barrels such as 48°API gravity Eagle Ford.
This is reflected in the data. The weighted average API gravity of EU crude imports in 2016 was 35.2°, according to
Eurostat. Refinery inputs look similar: the current average API gravity of of the crude entering American refineries is approximately 32.3°, nearly unchanged for the past 30 years despite the recent rise in light oil output. Worldwide investments into more complex, higher conversion refineries have eroded very light sweet oils' long-prized light-distillate yield advantage.
1m b/d—US oil exports
Refiners like known crude grades and predictable crude qualities. While integrated majors familiar with US crudes are now moving light tight oil within their international systems, it has proved difficult to market many grades of US oils to refiners less familiar with them.
In fact, according to EIA figures the run up in US crude exports this year has been concentrated in sales to two countries: Canada, which has long familiarity with its neighbour's crude, and China. Chinese imports by crude stream aren't public, so it is difficult to detect whether it is buying established US crude grades, or very high API gravity shale oil. But recent reports indicate that India has acquired a mixed cargo of 1m barrels each of WTI and Southern Green Canyon, which are respectively 40°API and 28°API. The weighted average API gravity of Japan's crude imports from the US is only about 36.9°, according to Petroleum Association of Japan data.
If exports are concentrated in medium US crude grades rather than very light tight oil grades, where is the tight oil going? There is a technical limit to the US refining system's ability to absorb these crudes, so considerable volumes may ending up in American storage farms. Analysts say there's a net export of medium
—and heavier —API gravity crude from US inventory and that the gravity of US inventories is becoming progressively lighter. Meanwhile, US crude oil storage usage is running at around 70% utilisation, leaving limited space for further tank fill. Notably, Cushing storage volumes have risen while refinery storage volumes have fallen, which points to slack market interest in light sweet shale oils.
All this suggests that there is currently a limit to the market's ability to absorb further volumes of very light US tight oil
—a trend that won't disappear in 2018. In the medium term, refining systems, not least in the US, will undoubtedly adapt to welcome these crudes in large volumes. But for the time being the market is glutted. Expect a narrowing of the sweet-sour crude differential and a persistent WTI discount to Brent.
Bill Barnes is Director of energy consultancy Pisgah Partners
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