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Unless regulatory constraints to export crude oil are removed, WTI crude oil prices should drop from here, averaging $90/bbl this year. As WTI follows Midwest grades lower, Brent-WTI spreads could widen again.

08 May 2013

Commodity Online
US crude oil inventories are increasing across the board. Commercial crude stocks in the US are sitting at 395 million bbls, an all-time high level and only 37 million bbls away from what Bank of America Merrill Lynch estimates to be tested maximum storage capacity.

True, stocks at Cushing, Oklahoma—the pricing point for WTI—fell to 49.8 million bbls in the last available report, briefly pushing prices above $96/bbl. But as other sites fill up, the Oklahoma hub may now hold nearly 45% or 16 million bbls of the country’s total tested spare capacity, a report from the Bank noted.

“As storage tanks continue to fill up, we see growing downside risks to WTI crude oil prices and time spreads. Meanwhile, crude oil imports into the US are being displaced by domestic barrels. US refiners are displacing foreign barrels as fast as they can. At first look, heavy crude imports seem to be holding up,” said the report.

But this is only because Canada displaced barrels from Venezuela and Mexico. In contrast, intermediate US crude oil imports have taken a big hit, falling from 3.5 to 2.2 million b/d in the last eight months.

Domestic tight oil output has also displaced about 1.1 million b/d of mostly African light sweet barrels since the first three months of 2010, and Canada, Saudi, and Mexico have held on to their market share.

With Canadian imports continuing to push other barrels out, BofAML cross-price elasticity analysis of recent US crude oil import trends suggests there may just be 300 thousand b/d of light and 600 thousand b/d of intermediate barrels left to displace. It is a Mexican-Canadian-Saudi standoff!

Storage & import displacement limits 

In sum, scope for substitution may be running out and commercial stocks are almost full.

Making things worse, America keeps about 700 million barrels of crude oil in the Strategic Petroleum Reserve (SPR), and import coverage ratios are surging. So there are way too many barrels in commercial and strategic storage in the US, and the ability of refiners to keep displacing foreign crudes seems limited going forward.

Unless regulatory constraints to export crude oil are removed, WTI crude oil prices should drop from here, averaging $90/bbl this year. As WTI follows Midwest grades lower, Brent-WTI spreads could widen again.


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