Shale revolution boosts US Gulf refiners; Record discount to Brent global benchmark highlights impact

November 5, 2013 1:11 pm

Shale revolution boosts US Gulf refiners

By Ajay Makan in London

Crude oil prices in the Gulf of Mexico have been pushed to record discount levels against the Brent global benchmark, boosting profits for refiners in America’s principal oil processing hub. The moves are the latest sign of the impact of the shale revolution on the US refining industry and promise to further accelerate already booming US exports of petroleum products.US oil production has surged in the past three years thanks to shale formations such as North Dakota’s Bakken.

Infrastructure constraints made it costly to move that oil to the country’s main refining hubs in Texas and Louisiana, limiting the benefits to the oil industry and the wider US economy.

But improving transport links has had a big effect on crude prices in the Gulf of Mexico – a region that accounts for about half of US refining capacity.

The price move comes as the rapid build-up of refining capacity in the Middle East and Asia is hitting profits at oil majors such as ExxonMobil and Royal Dutch Shell.

It illustrates how US independent refiners such asValero and Phillips 66 are benefiting from access to cheap shale oil while the rest of the industry struggles.

It also means that US exports of products such as diesel and petrol, which have already tripled in just seven years, could rise further at the expense of European peers.

“The discount is very significant,” said Jonathan Leitch, a senior analyst at Wood Mackenzie. “It means refineries can push their products further afield into Africa and Latin America.”

He estimates that the profitability of refineries in the Gulf Coast has increased by almost $5 per barrel since the start of September.

The benchmark US oil price, West Texas Intermediate, has fallen by almost 10 per cent in the last month to a little above $94 a barrel – a discount of more than $10 per barrel to Brent – as US refiners have bought less crude due to seasonal maintenance, triggering a sharp rise in crude stocks.

In recent years, the discount of WTI to Brent has been even steeper but transport bottlenecks around the delivery point for WTI at Cushing in Oklahoma meant only a few refineries had access to the cheap crude.

The discount is very significant. It means refineries can push their products further afield into Africa and Latin America

– Jonathan Leitch, senior analyst at Wood Mackenzie

This time around, prices at the Gulf Coast have also fallen after a flurry of pipeline projects opened this year, making it easier and cheaper to move crude to the Gulf coast from Cushing, and directly from shale fields in Texas.

Louisiana Light Sweet, the regional benchmark, traded for $10.49 per barrel less than Brent last week, by far the largest discount in Reuters data back to 1989.

LLS has traditionally traded at a premium to Brent to reflect its superior quality and the higher cost of shipping African crude blends, which are priced off Brent, to the US rather than Europe.

Other Gulf blends such as Mars have also traded at record discounts to Brent in recent weeks.

The weakness in Gulf Coast blends has also made some crude oil imports to the Gulf Coast cheaper.

Imports from Saudi Arabia, for example, are priced off a basket of Gulf Coast crudes, which includes Mars.

The largest beneficiaries will be independent refining companies, such as Valero, which operates several refineries in both Louisiana and Texas.

US and European oil majors such as Exxon and Shell also operate refineries in the region.

It is unclear how long the steep discounts on the Gulf Coast can last, once refineries return from maintenance and begin demanding more crude.

Although fast-growing domestic production has eased US dependence on foreign oil, more than 3m barrels are still shipped to the Gulf of Mexico each day to meet demand from refineries.

“I would expect LLS to converge with Brent in the short term because the Gulf Coast still needs to attract some barrels from the global market,” said Michael Wittner, head of oil research at Société Générale.