Here’s something the oil market hasn’t seen lately: A price rally.
After falling as low as $46 per barrel on Aug. 30, when Hurricane Harvey forced Gulf Coast refineries to shut down, benchmark West Texas Intermediate crude oil has soared to about $57 per barrel. The price run-up reflects several factors: Improving economic growth around the world; hints from OPEC that its current policy of limiting crude exports will continue for longer than first scheduled; and turmoil in Saudi Arabia, where several high-ranking officials and members of the royal family have been arrested on corruption charges. (Anything that threatens the internal stability of OPEC’s largest oil producer is bound to raise concerns about potential interruptions in crude shipments.)
OPEC members undoubtedly are celebrating oil’s sudden bull market. Starting in 2014, the cartel watched oil prices tumble from $100 per barrel to as low as $26 in early 2016. Prices have since recovered in fits and starts but seemed unable to break above $50 per barrel. Originally, increased U.S. production was to blame. And American firms’ ability to keep wringing more crude from shale fields has kept a ceiling on the price recovery.
What’s good for OPEC is also good for Texas and North Dakota. Why? Because U.S. energy firms are filling the void in the global market left by OPEC. Pumping fewer barrels has helped lift crude prices, but the barrels that OPEC isn’t selling are increasingly being supplied by American wells instead.
Last week brought a milestone for the U.S. energy industry: Exports of American crude oil jumped to 2.1 million barrels per day, the highest level on record and the first time that daily exports topped the 2 million-barrel mark. That underlines the trend of steadily rising exports that began after Congress lifted a ban on U.S. oil exports in late 2015.
The U.S. is still a net importer of oil. Daily production of about 15 million barrels of crude and other liquid fuels is nowhere near enough to satisfy demand of roughly 20 million barrels. So why is American oil departing the country for overseas markets?
Not all oil is equal. And American barrels are highly sought overseas. Much of the shale oil bounty unleashed by advances in hydraulic fracturing and horizontal drilling is “light and sweet” crude, meaning it is low in density and sulfur content. Many refineries around the world covet such grades of crude, whereas many U.S. refineries are designed to process heavier, “sour” grades with higher sulfur content.
Also, not all oil costs the same. American oil enjoys a distinct cost advantage over foreign rivals. The most familiar American crude benchmark, West Texas Intermediate, currently trades at a wide discount to Brent, the most prominent global benchmark.
That price “spread” makes it cost-effective to export more U.S. crude. In a recent webinar held by S&P Global Platts, Associate Editorial Director Matthew Cook estimated that it costs about $2 per barrel to export American oil to Europe. The price gap between WTI and Brent of $7 per barrel makes such a sale highly profitable for firms able to take advantage, such as BP and Trafigura, two of the biggest crude exporters operating in the U.S.
Given the favorable economics of exporting, expect more U.S. barrels to flow from the Gulf Coast to Europe, Asia and elsewhere. S&P Global Platts Managing Editor John-Laurent Tronche says that ports such as Corpus Christi, Texas, can ship out even more and are racing to add to their export capacity. Today the U.S. can export up to 2.7 million barrels of oil each day, comfortably above last week’s record-high level.
The combination of higher prices and strong exports is especially good for companies operating in the prolific Permian Shale basin of West Texas. S&P Global Platts estimates that a new well can break even in the Permian when oil prices are as low as $30 per barrel. Today’s $57 price makes many Permian wells quite profitable. And the Permian region is connected to Gulf Coast ports by an extensive pipeline network. Not surprisingly, production is growing fast in the Permian.
Of course, today’s profits can evaporate tomorrow if oil prices suddenly retreat. And the oil market has been nothing if not volatile recently. In my next issue, I’ll look at this rally’s durability and where prices are headed.