Will too much light oil from U.S. shales cause a problem?

[dan_s]

Comments below are from Tudor Pickering Holt on April 20, 2018:

US Shale Does Not Have a Refining Problem (Part I)

Booming light production in the US

Sector: Refiners | Ticker: XOI | Recommendation: NA | Target: NA | Close: $1,471

Surging US crude production has prompted another round of investor questions regarding potential end markets for these new barrels. Based final Jan'18 DOE data, US crude production was up +1.1mmbpd y/y, with more than 90% of this growth lighter than the standard WTI spec (39.6 API). In fact, 46% of this growth was >45 API. At the same time, US refineries are running a medium slate that has moved slightly lighter over time, but not by much (31.8 API in 2017 vs 30.8 API in 2013). In addition, PADDs 2 & 3 are down to a trivial amount (11mbpd over past three months) of non-Canadian light crude imports. PADDs 1 & 5 are still importing >400mbpd of non-Canadian lights, but a lack of pipeline and rail infrastructure makes it more difficult and costly to get US barrels to refineries in these regions. So are we setting up for another Fall of 2012, when WTI traded $24/bbl under Brent? Or perhaps another Fall of 2013, when LLS was $15/bbl under Brent?


US Shale Does Not Have a Refining Problem (Part II)

Crude exports, hungry Europe/Asia refineries, and IMO 2020 will ensure a strong market for US crudes

Sector: Refiners | Ticker: XOI | Recommendation: NA | Target: NA | Close: $1,471

We don't think so, for three straightforward reasons. First, the most obvious change between then and now is that crude exports are now permitted. The US exported 1.3mmbpd of crude in Jan'18, although recent weekly data points have been above 2.0mmbpd. Shell loaded a crude VLCC out of LOOP in Feb, and Oxy is looking to do the same out of Corpus Christi by the end of the year. Although more infrastructure will surely be needed, it's difficult to envision any structural bottlenecks that would temper US crude exports. Second, Europe and especially Asia are hungry for US crude. These regions feature a much simpler refining base that will eagerly accept light US barrels that are easier to process than medium grades. In Jan'18, US crude exports to Asia were 524mbpd, which represented a remarkable +167% y/y gain, yet US crude only accounts for 1.9% of Asia refineries' crude slate. In Europe, US barrels only make up 2.3% of the crude slate, offering plenty of room to take additional share. And third, the upcoming IMO 2020 regulatory change is likely to increase demand for just the kind of light sweet barrels that the US produces. On Jan 1, 2020, the allowable sulfur content in marine fuel (a 5.3mmbpd market) will drop to 0.5% from 3.5%, which by our estimates will pull 1.5mmbpd of low sulfur distillate into the marine pool. This is good news for light crudes, which generally offer higher distillate yields than mediums or heavies. It's also good news for sweet crudes, since sulfur will become a more costly part of the barrel.

US Shale Does Not Have a Refining Problem (Part III)

Strong US crude production still a net benefit for US refineries

Sector: Refiners | Ticker: XOI | Recommendation: NA | Target: NA | Close: $1.471

To be clear, booming US production is certainly a net positive for US refiners. The sheer amount of production growth has helped pushed Brent-WTI to an appealing $5/bbl (vs $2/bbl a year ago), which offers a significant profitability boost for inland refineries. Brent-Bakken difs are almost out to $9/bbl, putting crude-by-rail back into play for select coastal regions. In addition, certain regional bottlenecks are likely to develop, especially in the Permian over the next 12-15 months. But it's difficult to see the market turning its back on US crude in the foreseeable future. Our Brent-WTI spread forecast is in the $3.50-4.00/bbl range through 2020.

[cmm3rd]

Dan,

A somewhat related question:

Might producers of heavy crude might be better investment opportunities than those of light crude, given decline of Venezuelan imports and our refineries’ needs, and assuming all other things are equal (which they never are)? Which of our Sweet 16 or small caps might fit this description?

Thanks

[dan_s]

Devon Energy (DVN) produces a lot of heavy oil.

The Permian Basin companies already trade at high multiples, so take a look at the Eagle Ford and SCOOP/STACK companies.