A flood of light, sweet crude oil flowing into Gulf Coast refineries will push out all imports of this hydrocarbon as soon as this summer, according to John Freeman, managing director of E&P equity research for Raymond James. Expect East Coast imports to follow the same trajectory next year.
Imports of light sweet crude into the Gulf Coast refinery complex have trended down by 1 million barrels over the past two years, with just 200,000 barrels currently being imported, Freeman told attendees at a Houston Producers Forum event in May. “By our numbers, we’re going to completely back out Gulf Coast light sweet imports in the next couple of months.”
New pipelines transporting Permian Basin production, crude by rail, expanded Eagle Ford shale supply and the southern portion of the Keystone XL pipeline have contributed an additional 700,000 to 900,000 barrels per day inflow. “The bottleneck we’ve had the past few years at Cushing, we’re just moving it to the Gulf Coast.”
Once that happens, how long does it take to back out upper East Coast light sweet imports? “The East Coast has a little more running room,” he said, with some 400,000 barrels per day of imported light sweet currently. “Sometime in mid-2014 you will have backed out the East Coast’s ability to refine the light sweet,” he predicted.
The wave of oil flowing into U.S. refinery complexes is a direct result of increased production using enhanced recovery technologies in tight oil basins, previously unrecoverable. “What we’re doing is amazing,” he said. “In six years (the industry) is going to reverse all declines we’ve had in U.S. oil production in the prior 20 years.”
The “big three” driving growth are the Bakken shale, the Eagle Ford shale and the Permian Basin, contributing 95% of oil supply growth over the past three years.
As supply increases, Freeman said moving the oil is becoming more and more difficult, leading to inevitable pricing discounts.
“Oil demand is anemic, and oil supply growth is going through the roof in this country,” he said, “so our inventories continue to get more bloated.”
In the short term, Canada has and will continue to be an outlet for increasing U.S. supply. Currently, some 120,000 barrels a day are being shipped to eastern Canadian refineries, which can handle 350,000 to 400,000 barrels of light sweet imports.
“It won’t take long before we’re pressing up against that, maybe 12 to 18 months,” Freeman noted. “If it wasn’t for them and for some export permits that are quietly being allowed by the (U.S.) government to a handful of companies, we would already have been in trouble.”
Waivers to export crude to Canada will continue, he believes. “We don’t have a choice but to send unrefined oil to Canada to the extent they can take it.” But the odds of a complete lifting of the ban on exporting crude is not likely in the next five years, he said.
Combined with global macro factors for oil that anticipate ramped supply from Saudi Arabia, Iran, Sudan and the North Sea, contrasted with slowing demand in China and India, Freeman portends a precipitous drop in the price of oil due in 2014. Raymond James projects an average $70 for WTI and $85 for Brent crude for the year.
“Oil inventories over the last 18 months have been trending higher. In 2014, we should be almost 2 million barrels oversupplied (globally),” Freeman said. “Unless Saudi wants to take its oil supply to 25-year lows, oil prices are probably going to go lower.”
On a more positive note, independence from foreign oil imports is inevitable as U.S. supplies continue to increase. U.S. oil imports have decreased by 6 million barrels per day over the past seven years.
“In essence, they’ve been cut in half. By our numbers, we’re independent sometime in the early 2020s.”
In a nod to natural gas, Freeman said better days are coming for those that can wait. “
If all the LNG facilities that are approved to be built happen, and if all the industrial plants that are supposed to be built get built, we think there is going to be a super spike in natural gas around 2016 or 2017.”