Signs point to balancing US crude markets

Houston, 29 April (Argus) — After years of inverted spreads and unusual pricing relationships because of the shale oil boom, a variety of pipeline reversals, expansions and newbuilds may be returning US crude markets to more traditional trends.

For several years better quality light sweet crudes have traded at discounts to heavy sour counterparts in several US markets. This includes WTI at Midland trading below West Texas Sour (WTS) and Gulf of Mexico crude Poseidon trading below Mars. This unusual reality stemmed from rapidly rising production of some domestic grades, particularly from inland fields, and the resulting sharp fall in imports that ensued.

This meant that the tradition flow of imported crude from coastal ports to refineries inland was turned on its head, as ample US production and Canadian crude meant volumes now needed to move from inland production and storage areas to refineries along the coasts.

But existing infrastructure was not designed to handle such a rapid and extensive change. This led to skewed price relationships between some grades because of transportation bottlenecks. Producers scrambled to move crude by rail, which had not been seen in the US for decades, and reverse, expand or build new pipelines.

After years of work and heavy investment in transportation logistics, it appears US crude markets could be getting close to returning to a balance with prices determined by market forces rather than logistical issues.

West Texas Sour (WTS) crude has for years been trading at premiums to West Texas Intermediate (WTI) even though WTS is of inferior quality and both grades trade at the same location in Midland, Texas. At the same time, values for WTI Midland have been below those for light sweet crude at Cushing, Oklahoma, which is also inferior in quality to field grade WTI Midland.

Since early February WTI Midland has been at a premium to WTS following the start-up in late January of the 300,000 b/d Southern Access Extension pipeline. After falling to as low as 35¢/bl below WTS at the end of January, WTI Midland was more than 90¢/bl above WTS yesterday. It appears to be providing WTS buyers with a new level of optionality that allows them to choose between competing crudes more freely.

WTI Midland has also been trading at a small premium to light sweet crude at Cushing since the end of the May trade month earlier this week. Since the beginning of April, the WTI Midland price has averaged a 30¢/bl premium over light crude at Cushing. WTI Midland can access the Houston market through the reversed 275,000 b/d Longhorn pipeline and the relatively new 300,000 b/d BridgeTex pipeline.

Those WTI movements from Midland to Houston led to the birth of a spot WTI Houston market in late 2014, a market that is now actively traded, averaging close to 135,000 b/d in spot trade over the past three trade months. A similar situation developed with heavy Canadian crude more recently, which led Argus to launch a WCS Houston assessment in late March.

Yesterday, light WTI was at a $10.35/bl premium to heavier WCS at Houston.

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