In the world’s biggest oil market, buyers have better options than U.S. crude.
As the country inches toward ending the last restrictions on exports, Asian buyers will probably have a limited appetite for the quality of crude on offer. Many of the region’s refiners are geared to process heavier, cheaper oil with higher sulfur content. The lighter and cleaner shale oil from the U.S. has also got about a third farther to come than alternative supplies from the Middle East and that represents an additional cost.
“U.S. light oil economically is not viable for most of Asian refiners,” B.K. Namdeo, head of refineries at state-run Hindustan Petroleum Corp., said by phone from New Delhi. “The majority of the refiners in this region are not configured to use light oil, plus there is a long charter time and high freight costs involved.”
Horizontal drilling and hydraulic fracturing has unlocked a flood of light, sweet oil from shale rock, pushing the U.S. toward ending its 40-year export ban. President Barack Obama is expected to sign legislation that will end the restrictions, the culmination of years of lobbying by an industry faced with a domestic oversupply.
Shipping Costs
Oil buyers in Asia are already reaping the benefits of a global glut that’s driven prices down about 35 percent over the past year. The Organization of Petroleum Exporting Countries, which supplies the region with most of its oil, has effectively decided to abandon production limits in the hope that unrelenting stream of cheap crude will squeeze out rivals. That’s treated Asia to a steady flow of cargoes from the Middle East to Mexico, Nigeria and Russia as producers compete for market share.
For Japanese refiners, buying U.S. crude isn’t profitable relative to Middle East supplies, according to Masashi Nakayama, the general manager for crude oil and tanker department at Cosmo Oil Co. It takes a tanker approximately 27 days to reach the Japanese port of Chiba from Saudi Arabia’s Ras Tanura terminal, versus 38 days for a ship departing from Houston, according to Sea-Distances.org.
U.S. benchmark West Texas Intermediate crude cost about $2.80 a barrel more than the Middle East’s Dubai oil on Thursday, according to data compiled by Bloomberg. As recently as March, it was $7 cheaper. The U.S. marker grade was 79 cents below Brent, up from a discount of about $7.50 at the end of March.
Displacement
Higher shipping costs add to the premium for U.S. oil. An Aframax-sized tanker, which is typically used to carry American supplies to northeast Asia, costs about $5 a barrel from the U.S., compared with about $2.25 a barrel for a Very Large Crude Carrier from the Middle East, the most-frequently used ship for that route, according to Clarksons and Braemar ACM shipbrokers.
“For Asian refineries, it won’t be cost effective to use U.S. light oil,” said Arun Kumar Sharma, finance director at Indian Oil Corp., the country’s biggest refiner. “But Asian refiners will benefit from those displaced volumes that U.S. tight oil will replace,” which may come from the Middle East or Africa, he said.
Some cargoes of U.S. condensates, a very light type of oil typically produced along with natural gas, have been making their way to buyers in Asia this year. The shipments aren’t profitable with current regional price differences and freight rates, according to a survey Wednesday of three buyers and producers.
The Asia-Pacific region will consume 31.93 million barrels a day of oil in 2015, exceeding demand of 31.17 million barrels from the Americas, the International Energy Agency said in a report on Dec. 11. China, India, Japan and South Korea will be among the biggest users of crude, according to the Paris-based agency.
Blending Up
Both Japan and South Korea relied on the Middle East for about 84 percent of their oil imports last year, according to the U.S. Energy Information Administration. The region accounted for about 62 percent of India’s overseas supplies and 52 percent for China.
China, Asia’s biggest importer, may purchase U.S. oil as the country’s independent refiners seek lighter crudes to mix with heavier, cheaper feedstocks, according to Wu Kang, a Beijing-based analyst with FGE, an energy researcher. Smaller plants, known as teapots, account for almost a third of the nation’s processing capacity and 13 of them have been granted import quotas totaling a combined 55 million tons, or 18 percent of nation’s annual imports.
U.S. producers may find a more attractive outlet in Latin America, where refiners are in need of light, sweet shale oil that can help dilute heavier crudes common to the region, said Ehsan Ul-Haq, a senior analyst at KBC Energy Economics.
It’s also not always about money. Buyers in Japan and South Korea have welcomed the arrival of U.S. barrels because it adds another option to choose from for countries that rely heavily on the Middle East.
“If U.S. crude exports become reality, supply sources will be largely diversified,” Yoshihide Suga, Japan’s chief cabinet secretary, said Thursday. “That will result in contribution to Japan’s energy security.”
makati1 on Thu, 17th Dec 2015 7:47 pm
The same oceans that once protected America from the world will soon be a huge wall keeping trade out and Americans in. US isolation is the future (if we get thru the next decade without a world war). Shipping across thousands of miles of ocean is expensive and time consuming.
As the World Island becomes connected by high speed rail, other land connections and short ocean hops, it will become the power center, and the Americas the 3rd world. That is what the Empire is fighting to prevent, but losing.
jjhman on Thu, 17th Dec 2015 8:30 pm
Help! Somebody explain to me the need to either limit or expand US export of oil. The US is still a significant importer of crude. So I asssume that the net flow of oil will not change after export limits are removed. The only obvious change will be that for US consumers the average price of WTI oil will increase towards Brent and the average price of Brent will move towards WTI. But since the amount of oil referenced to Brent is enormous compared to WTI the change will be insignificant. What am I missing? Except that maybe some large US producers will make a lot of money on the difference.
antaris on Thu, 17th Dec 2015 8:39 pm
JJ , bullshit baffles brains and this just gives the politicians and promoters brain baffling material to bullshit the masses.
rockman on Thu, 17th Dec 2015 11:10 pm
jj – “The US is still a significant importer of crude. So I assume that the net flow of oil will not change after export limits are removed.”
There no “export limits”. US companies can export as much oil as they have buyers for it. All they need do is request an exemption from the govt. And those exemptions are easy to get. In just the last 10 years (according to the govt’s own EIA) US crude oil has been exported to Brail, China, S Korea, the Netherlands, Costa Rica, Italy, Spain and Switzerland.
Of course the vast majority has been exported to Canada which has been easier to do since no exemption is required because a CONGRESSIONAL LAW has for many years allowed any US company to export as much oil to Canada as they can sell. And there is a huge market in Canada for our oil: about 25% to 35% of the millions of bbls/day of oil sands production is actually a blended oil. This “dilbit” (DILuted BITumin) can be pumped through pipelines…the unblended oil sands production can’t. About half of that oil is imported from the US…about 130 million bbls/yr.
Also are you aware that every bbl of those Canadian imports, about 1 BILLION BBLS per year, can be exported from the US. It doesn’t even require an exemption to the “ban”: trade laws prohibit any restrictions by the US govt.
And once again back to a more important question IMHO: what’s the difference between exporting millions of bbls of US oil per day and exporting refinery products (for which there is no “ban”) made from those same millions of bbls of oil per day? The US currently exports refinery products made from about 3.5 million bbls of US oil per day. At about 1 BILLION BBLS PER YEAR the US is the largest exporter of petroleum products on the planet.
And given how easy it was to export US oil already note that some time ago the govt made it even easier to export Eagle Ford Shale production: no exemption required. Oil stabilizers, increasingly built in oil fields far away from refineries, are generally cheaper than cracking towers at refineries. The govt’s interpretation: that stabilizers turn the EFS production into a refined product like gasoline. Refined products that do not require an export exemption. As soon as the feds changed the rules large volumes of Eagle Ford Shale “refined products”…not oil…began shipping to S Korea.
And once more it doesn’t matter how many folks keep talking about the US “oil export ban” there is no ban. And that FACT is based solely on the data put out by the same US govt that so many have claimed bans US oil exports. No one has to believe the Rockman: go pull up the US ENERGY INFORMATION SERVICES data yourselves. It’s all there in black and white. lol
GregT on Thu, 17th Dec 2015 11:41 pm
“bullshit baffles brains and this just gives the politicians and promoters brain baffling material to bullshit the masses.”
It also fools the masses into believing that investing in the market has future potential.
Anonymous on Fri, 18th Dec 2015 1:50 am
The reason Canada is exempt from whatever regulations the US may have, is because the US owns the ‘Canadian’ oil industry. The US owns of course a lot of other ‘Canadian’ industries as well, but oil and energy are for all intents, US assets. It makes no sense for the US to impose annoying regulations on its holdings in Canada, so they didn’t.
James Tipper on Fri, 18th Dec 2015 9:08 am
“Asian buyers will probably have a limited appetite for the quality of crude on offer. Many of the region’s refiners are geared to process heavier, cheaper oil with higher sulfur content. The lighter and cleaner shale oil from the U.S. has also got about a third farther to come than alternative supplies from the Middle East and that represents an additional cost.”
So many lies I stopped counting…and reading.
rockman on Fri, 18th Dec 2015 9:56 am
James – Understood. Had the same problem with deciding where to begin. For example that Chinese refineries are designed to crack only heavy crude. Same BS repeated about US refineries. The Chinese refineries BLEND their heavy oils with light oils just like our refiners do. I pulled up some of the specs on ALL their oil imports but too much tech data to explain. Like why China is a huge importer of US methanol: critical in their production of motor fuels.
Mike616 on Fri, 18th Dec 2015 11:12 am
Interesting stuff.
Japan contradicts itself.
US oil will help it’s energy security, but it won’t import any.
So, it actually won’t help energy security.