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Last week's U.S. decision to further ease a longstanding ban on most oil exports arrived just as the economic window for selling more domestic crude abroad is, at least for the moment, shutting.
After years of relentless shale-driven supply growth, U.S. oil production is shrinking and may fall as much as 10 percent over the next 12 months as drillers slash spending. Meanwhile, global output continues to grow, with Iran alone set to add as much as 1 million barrels per day next year.
As a result, some analysts, including Bank of America-Merrill Lynch, are warning that U.S. benchmark crude prices could rise back above global marker Brent, if only temporarily, next year. That would invert a key price spread for the first time since 2010.
A closed export arbitrage may not stop Mexico from taking advantage of permits to import U.S. crude in exchange for more of its own exported oil, something it has been seeking for years as a means of improving its refinery operations. On Friday, a U.S. administration official said swap licenses would be issued in the coming weeks, the latest milestone loosening the contentious decades-old U.S. ban.
Signs of an ebbing foreign appetite for U.S. oil were already appearing this summer as domestic refiners soaked up vast volumes of crude to sustain record run rates to meet resurgent domestic demand and bolster fuel exports.
Exports of processed condensate - a form of ultra-light oil that can be sold abroad because it has been lightly refined - dwindled to a trickle this summer after reaching a record near 100,000 bpd in March, according to ClipperData.
Refiners in Europe and Asia have abundant supply choices, with unrelenting production from Saudi Arabia and other OPEC nations - and the looming revival of Iran's output after years of sanctions - not only driving headline oil prices to six-and-a-half-year lows, but knocking North Sea and West African crudes to their deepest discounts in a decade earlier this summer.
"Global balances are just sloppy," says Eric Lee, an energy analyst at Citigroup. "Brent and global crudes are likely to be weak enough to keep U.S. exports rather constrained."
On Friday, Brent futures for October delivery were trading about US$6.50 a barrel over the U.S. benchmark, having more than doubled since June. But in six months time, the spread is only US$5.50 a barrel, with traders already pricing in a narrower gap that could throttle exports.
SUPPLY SWINGS
For much of this year, U.S. production has been surprisingly resilient in the face of falling prices. Data from North Dakota, the No. 2 U.S. oil producing state, on Friday showed that output increased in June, much to the surprise of Wall Street.
But the nationwide trend is changing. The Energy Information Administration says domestic output peaked in March at 9.69 million bpd and will fall by more than 900,000 bpd until next August before it resumes growing again.
Meanwhile, global supply is seen moving in the opposite direction. Over the same period, production of crude and other liquids outside of the United States is expected to climb by nearly 1.4 million bpd, according to EIA forecasts. Unlike the nimble U.S. shale patch, where drilling can be stopped or started within months, most global oil projects take years to develop, meaning it takes much longer for tumbling prices to affect supply.
With diminishing supplies of U.S. shale, benchmark WTI crude "may have to temporarily trade above Brent and Dubai next spring to ensure there is enough gasoline to go around," Bank of America-Merrill Lynch analysts wrote two weeks ago.
Short-term dynamics may actually increase the odds of an export push this fall, when U.S. refiners shut down for seasonal maintenance work. Inventories of excess U.S. crude have already begun rising much sooner than expected, driving prompt prices to a deepening discount. November WTI is at US$1.20 a barrel below October, the widest since April.
But down the road, "if we see production slowing in a significant way, then that will change the balance of things," says Katherine Spector, head of commodities strategy at CIBC World Markets in New York.
If the spread narrows back to the US$2 to US$3 seen earlier this year - Brent-linked crudes could easily and economically make the trans-Atlantic route and compete with U.S. crude.
If so, Mexico's state oil firm Pemex, which has never before imported crude on a sustained basis, may face a curious question: utilize the swaps with U.S. exporters, or simply buy discounted rival crude from places like Nigeria.
Pemex had been seeking an exchange of about 100,000 bpd, equivalent to about 1 percent of U.S. output. It was unclear how much the new licenses would cover.
In July, with refiners running full-tilt and the Brent/WTI spread briefly narrowed, U.S. imports from Nigeria jumped to 100,000 barrels bpd, four times the average for the first half of the year, according to the EIA.
As analysts at Barclays wrote, the "relative attractiveness of U.S. crude oil compared with other options available to Mexico (including Mexican light oil) remains unclear."
