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U.S. Crude Exports Set To Hit New High Into Year-End

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Includes: AOIL, BNO, DBO, DTO, DWT, NRGD, NRGO, NRGU, NRGZ, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU, YGRN
by: HFIR
Summary

The majority of the investment community following the Saudi news is fixated on the total production outage, but the more important issue is the crude quality issue.

What happens then is that the market will look for a replacement, and the only place in the world today with excess crude storage is the US.

US crude export arb signals very elevated US crude exports into year-end.

We are seeing ~3 to ~3.3 mb/d for US crude exports in October with an all-time high for November.

This now opens up the possibility US crude storage falls to ~350 mbbls by year-end widening our expected WTI forecast from $70 to $85/bbl.

Welcome to the export it all edition of Oil Markets Daily!

The majority of the investment community following the Saudi news is fixated on the total production outage, but the more important issue, as we will highlight in this article, is the crude quality issue. Abqaiq processes Saudi oil into Arab light and Arab extra light. The back-up for Abqaiq is currently unequipped to process the light sweet crude volume in the usual desired volume and with IMO 2020 coming, the light sweet crude shortage just got worse (and yes, all global crude grades are in a shortage).

What happens then is that the market will look for a replacement, and the only place in the world today with excess crude storage is the US.

Source: CME, ICE, HFI Research

Keep in mind that Arab light and Arab extra light have API gravity of 33 to 38. So the ultra-light US shale oil won't be a replacement, but rather the ~38 API gravity WTI will.

Now if you look at the crude export arb, US crude exports will hit an all-time high in November. What will the total volume be? We don't know just yet, but we know that October is going to range between ~3 to ~3.3 mb/d.

We are currently seeing 7 VLCCs waiting for loading in October (4 in the Gulf, 3 incoming). This combined with Corpus Christi operating at max capacity filling Aframax leads us to believe that US crude exports will likely be closer to ~3.3 mb/d for October.

In the event that US crude exports do average that high and using a conservative refinery throughput figure, we have -4.86 mbbls for October US crude storage figures.

Now keep in mind that between Oct 4 to Nov 1, the 5-year average shows a build of 16.846 mbbls. So this will have a ~21 mbbl divergence from the average and set us on pace to fall below ~380 mbbls by year-end.

So what should be your takeaway from this?

Crude export arbs are now saying that US crude exports will remain elevated into year-end. Given that our preliminary projections used ~2.95 mb/d as the average for Oct to Dec, the elevated US crude exports now opens the possibility of US crude storage falling to as low as ~350 mbbls by year-end.

This now widens our exit WTI target into ~$70 to ~$85/bbl.

Disclosure: I am/we are long UWT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.