Shale boom cuts Gulf oil premium to 24-year low

Getting to Market

“We have all these sweet barrels in the Midwest that need to find a home, and they’re getting to the market by planes, trains and automobiles, you name it,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “You compound that with increased production in west Texas and the Eagle Ford, and you have a template for LLS to move to a discount.”

The capacity to transport light, sweet oil to the Gulf Coast from Cushing and inland shale formations will expand to more than 2 million barrels a day by the end of this year and 4.5 million by the end of 2014 from less than 500,000 barrels a day at the end of 2011, Klesse said yesterday.

Valero currently buys about 140,000 barrels of oil a day from Eagle Ford, said Bill Day, a San Antonio-based spokesman for the company. The crude is transported by truck to an unloading dock next to Valero’s Three Rivers, Texas, refinery. About 70,000 barrels a day is fed to that refinery, and the remainder via recently reversed pipelines to plants in Corpus Christi and Houston.

The company brought two foreign oil shipments totaling 547,000 barrels of light, sweet crude to Gulf Coast ports in June, down from 4.88 million barrels in June 2010, data from the Energy Department showed.

Inflection Point

Companies such as Phillips 66 are also rethinking long-term business plans because of cheaper domestic supply.

Phillips 66 Chief Executive Officer Greg Garland said Aug. 1 that the refiner had changed its mind about selling its Alliance plant in Louisiana in part because of forecasts that LLS will shift to a $2- or $3-a-barrel discount to Brent.

“In the interim year that passed since we first made that decision, our view has changed in terms of Gulf Coast crudes, particularly LLS, becoming an advantage,” Garland said on a conference call with analysts and investors.

The shift in the U.S. market could have lasting repercussions on global markets as well.

Weaker Brent

A drop in U.S. imports of light, sweet oil could weaken Brent, Garcia said. Raymond James is forecasting $80 Brent next year, based predominantly on production growth in non-OPEC countries like the U.S., he said.

“People think that U.S. supply growth is sort of disconnected or irrelevant because it can’t export, but it can back out imports and we believe that will have a significant impact on the global oil markets,” Garcia said.

Federal law restricts exports of crude oil without permission from the president. The U.S. exported just 0.7 percent of domestic oil production in June, with none of it leaving from the Gulf Coast, Energy Department data show.

Bloomberg News

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