By Russell Blinch
At A Glance
- Shale oil technology, matched with the 2015 lifting of the U.S. crude oil export ban, is adding millions of barrels per day to the global crude market.
- Increased exports have changed trade routes and solidified WTI crude oil as the global benchmark.
Everything’s bigger in Texas, and that includes its light sweet crude grade that plays a super-sized role on the global stage.
The United States is an oil exporting powerhouse, thanks to booming shale production over the past decade. American crude is flowing more freely than ever before to where it’s needed, including to Europe, which turned to the U.S. after Russian war sanctions disrupted crude flows. As a result, the U.S. Gulf Coast is proving to be a pivotal supplier in a more dynamic energy market.
Euan Craik, as U.S. head of Argus Media’s operations from 2006 to 2020, had a bird’s-eye view of America’s metamorphosis from oil importer to exporter. “You had the situation where oil production was just growing and growing, and there was no place left domestically to place it.”
The shale boom posed new challenges – one being that infrastructure along the Gulf Coast had to be reconfigured to export crude instead of importing it.
“It took years to get this right and to reverse pipelines and build new ones,” said Craik, who is now President of Petroleum Markets at Argus Media Ltd in London.
Today, he said, “the crude will move down the pipeline to a storage terminal in Houston, where it will typically sit in a tank until someone wants to ship out a cargo.” Then a party will charter a vessel to take the oil, sometimes transferring the cargo to a bigger ocean-faring ship.
High Demand for U.S. Crude
Underpinning this market transformation is WTI crude oil futures, a 40-year-old tool that’s spurring greater competition in the world oil trade. The West Texas Intermediate grade, a blend of several streams of light sweet crude, is in high demand by refineries everywhere because of its ideal viscosity.
“What a futures market does is it allows economic decision-making at all times, when the market is in relative equilibrium and when the market is under stress,” said Peter Keavey, CME Group’s global head of energy and environmental products. “WTI is explicitly the most important pricing grade globally,” he said.
Craik at Argus remarked on the stunning size, transparency and liquidity of the WTI complex. “This doesn’t happen very often. This type of development is once in a generation, really. It’s the cherry on top of the cake for the shale boom.”
He said the market’s liquidity continues to build. “One of the exciting things is that liquidity begets more liquidity. So once you have a contract that works, it attracts more participants and as the information about that market becomes more transparent, it attracts speculative investment and pension funds and the like.”
He added, “We’re fielding calls from institutions who just want to understand the physical cash markets better because it’s an attractive investment for them.”
WTI crude futures are providing consumers a reliable way to manage their energy risks, providing a bay window into the direction of energy prices, unlike in the pre-futures era where OPEC held sway by manipulating its oil taps.
CME Group launched Argus-settled U.S. crude export grade futures in 2016, which have been widely adopted by the market. These include WTI Houston, WTI Midland and Mars spread futures contracts, which surpassed 500,000 in open interest – or the number of outstanding futures contracts – in May. Average daily trading volume in the Houston and Midland contracts were up 85% year over year through June, with open interest up 60%. The growth coincided with the inclusion of U.S. oil into the Dated Brent pricing mechanism earlier this year.
Exports Notch Records
Bob Iaccino, Co-Portfolio Manager of The Stock Think Tank, agrees that WTI is the most important pricing grade, given export growth. “You will never see a crude oil production cut from the United States. And that gives WTI a very powerful role because light sweet crude is the most desirable type of crude for gasoline – and gasoline is the most desirable byproduct from a barrel of crude oil.”
U.S. oil exports rose 22% in 2022 over the previous year to a record 3.6 million barrels per day, fueled by new demand in Europe, as Russian supplies came under pressure, according to data from the U.S. Energy Information Administration (EIA). The torrid export pace continued into 2023, with a record of 4.8 million bpd exported in March, largely because of resurgence in demand from China.
“As the U.S. has evolved into an export powerhouse, the price of WTI has become the most important barrel in the world,” said Keavey.
Oil shocks, demand spikes and economic slumps have staggered global oil markets on a recurring basis over the years. But surging production from U.S. oil shale fields, along with the lifting of the country’s crude export ban in 2015, has helped give markets extra supplies.
Production from shale oil totaled about 7.79 million barrels a day in 2022, equal to about two-thirds of U.S. production, according to the EIA. Shale production is forecast to rise to more than 9 million barrels per day by 2024, a steep climb from under 2 million barrels per day in 2012, according to forecast from the EIA.
Futures and Risk
Production from the North Sea is waning, which is only adding to the spotlight on the U.S. Gulf coast, where traders are busy loading tankers to help quench the world’s thirst for crude.
“It cannot be overemphasized how much the lifting of the U.S. export ban and the growing export base of U.S. crude has reshaped the market because it is by far the most significant shift in crude oil markets in the last 50 years,” said Keavey.
To reflect the new reality of global oil flows, WTI Midland crude is now part of the Brent benchmark basket, the first time a non-North Sea crude has been allowed in the benchmark complex.
“Bottom line for Brent is that it will be much more influenced by U.S. fundamentals such as Strategic Petroleum Reserve releases and Permian production,” Rebecca Babin, a senior equity trader at CIBC Private Wealth, told Reuters.
Today, U.S. production fundamentals and export levels show that WTI is the major crude oil grade setting the global marginal price.
“The tables are turning,” said Tracey Shuchart, CEO and Chief Market Strategist at Hilltower Resource Advisors, LLC, adding that while Brent was considered the benchmark, that was before WTI oil was allowed to be exported.
“It has given the European market options with which to manage their crude oil supply, which is what every buyer wants – they want options,” said Keavey.
“This allowed the market to rebalance very quickly from shocks,” he said. “We have a supply shock in Russia. And we have OPEC controlling supply using quotas. So U.S. crude allowed Europe to neutralize some of the other geopolitical factors.”
Redrawing Trade Routes
Buyers in Europe and elsewhere can be more discerning about where they source their crude supply, and have the option to manage their exposure. “It’s always a net positive to increase supply into a market and give buyers the flexibility to hedge their risk more efficiently,” Keavey said.
With the rise in U.S. production, the lifting of the U.S. export ban and the emergence of a Made-in-America benchmark, the U.S. has far more influence in global crude markets, making it less vulnerable to the global supply shocks of the past.
“With an increase in domestic production, you become less dependent on foreign oil, which reduces the vulnerability to supply disruptions and higher volatility in global markets,” Shuchart said. “Also, you gain greater flexibility in global markets, giving buyers more options.”
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.