US crude exports ban lifted: the implications for crude pricing

February 2016 | Tim Fitzgibbon, Anantharaman Shankar

At the end of 2015, the U.S. Congress fully liberalized exports of all grades of domestic crude oil, removing obstacles to market based flows and pricing. While the full impact will take months to confirm, pricing behavior before liberalization appears to have already been in line with export-netback pricing. As a result, we do not expect future pricing to be significantly different from what the industry saw through most of 2015.

Liberalization of US crude oil exports

Restrictions on the export of oil and oil products from the U.S. were put in place through a series of federal laws and Presidential actions in the 1970s, as a direct response to the Arab oil embargo and the resulting energy crisis. However, almost immediately, exceptions and loopholes began to develop, including removal of restrictions on product exports and special exceptions for exports of specific crude grades (e.g., Alaska North Slope, Cook Inlet, California Heavy).

Exhibit 1

More recently, as production from unconventional basins dramatically increased domestic US crude supply, the domestic crude market began to see distortions caused by the remaining export restrictions. Prices for domestic grades fell significantly versus international benchmarks despite the country still being a significant net importer of crude oil. Also, domestic refiners struggled to efficiently process the growing supplies of light sweet crude in refineries designed to process much heavier grades.

In response, the U.S. Commerce Department made a series of incremental exceptions to the export ban, gradually reducing its impact. This culminated in the full removal of the export ban through congressional actions at the end of 2015 and the first unrestricted loading of a crude export cargo in January 2016.

Pricing behavior of US light crude

The impact of the export ban and its eventual elimination can be seen in the pricing behavior of light sweet US crude relative to international benchmarks such as Brent.

Before the growth in unconventional production, light sweet crude oil on the US Gulf Coast priced consistently in competition with imported light sweet crude (from the North Sea and from West Africa) in US Gulf Coast refineries. That is, the price of domestic crude settled at a value that would give a Gulf Coast refiner the same margin as from running similar imported grades. This netted out to a premium versus the spot (fob) quotes for those grades largely in line with cost of their transportation to the U.S.

However, as US production increased, it eventually pushed out imported light grades, and prices became depressed even further. Initially, the only short-term outlet for excess domestic crude on the Gulf Coast was to move by expensive Jones Act transportation to the US East Coast and compete with remaining light crude imports there. This resulted in a Gulf Coast price far below the Brent marker.

Over time, as the industry adjusted, a market developed for the excess crude in Eastern Canadian refineries. Although these are farther away than the US East Coast refineries, they are exempt from using Jones Act vessels, making them much cheaper to access. This trade allowed prices on the Gulf Coast to rise versus Brent, though still remaining at an outright discount. At the same time, exceptions to the export ban allowing export of condensate and Canadian crude led to flows directly to Western Europe at net-back prices similar to the pricing into Eastern Canada.

Exhibit 2

By January 2016, after the export ban was completely eliminated, US light sweet crude was already pricing at levels in line with exporting the crude to Northwest Europe. In the weeks immediately after the elimination of the ban, there was a sharp rise in US crude prices putting them above the level that would support exporting crude. This raised concerns that elimination of the ban had shifted pricing to a new much higher level. However, this pricing appears to have been a result of short-term stock building in the U.S. in reaction to very low global crude prices and a steep market contango.

Outlook and implications

With the industry free to export crude oil and the supply of domestic light sweet crude in excess of what US refiners require, we expect to see modest but sustained exports of light sweet crude and condensate out of the US Gulf Coast. In the international market, this crude will compete with other Atlantic Basin crude grades such as North Sea and West African to serve short markets in Eastern Canada, Europe and Latin America.

Based on these flows, we expect the pricing of US crude on the Gulf Coast to remain at a netback value from the European market that puts it at a $1-2/bbl discount to Brent. This is effectively where it was pricing for most of 2015.

There is the potential over the long term to shift up or down from this level, depending upon the balance of crude on the Gulf Coast. To price higher, the crude balance would have to tighten to the point where light sweet crude from West Africa is again required to satisfy US Gulf Coast refiner demand. This is only likely with a dramatic decrease in supply from unconventional crude production.

For prices to fall further, the supply of crude would have to rise to levels requiring regular exports of US crude to more distant Asian markets. This is possible under some of the more optimistic outlooks for US crude production but would require higher global crude prices. The net effect of this on US crude prices would be modest at around an additional $1-2/bbl discount from current levels.


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This article is based on the market perspectives provided in PriceDeck Crude and Products Price Scenarios, published quarterly by Energy Insights.


About the authors

Tim Fitzgibbon is a senior expert with McKinsey’s Oil and Gas Practice in Houston and Anantharaman Shankar is an industry analyst with Energy Insights in Houston.

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