HOUSTON — About one week after the U.S. Commerce Department signaled it would allow trades of Mexican heavy crude for lighter U.S. oil, analysts have mostly dismissed the swap’s impact on the oil markets as only a minor improvement to refining efficiency.
Instead, market watchers say, the largest impact of the decision could be its symbolic value, cementing a crack in the long-standing crude oil export ban that U.S. oil can flow through.
But even symbolically, the move isn’t groundbreaking, said Mark Broadbent, an analyst at energy consulting firm Wood Mackenzie. The U.S. shares a long history of economic agreements with Mexico, and there’s little evidence that regulators are prepared to offer a similar exception for crude exports to more far-flung countries.
“In terms of the actual impact on the U.S. refining industry, it’s going to be relatively small,” Broadbent said, adding that “Symbolically, it’s a small step.”
The Commerce Department said on Aug. 14 it would approve applications on a case-by-case basis for selling U.S. oil to Mexico in exchange for purchases of a similar amount of Mexican crude oil. The department doesn’t discuss specific oil rulings and didn’t specify which applications would be approved, but it’s well known that in Jan. 2015, Mexico’s national oil company Petróleos Mexicanos asked the U.S. government for permission to swap about 100,000 barrels per day of its heavy oil for lighter U.S. crude.
In Mexico, the lighter crude oil would allow Pemex’s refineries to shift their output toward valuable gasoline and away from less valuable fuel oil. Mexico uses about 300,000 barrels per day of gasoline more than it produces, in part because its refineries yield about 25 percent less gasoline per barrel than U.S. refineries, according to Wood Mackenzie. Adding more lighter oil should help close that gap.
In the U.S., a swap could also help boost efficiency. Gulf Coast refineries are geared to run on heavier oil, and the shale boom has left many with too much light oil and less heavy crude — meaning a swap could help refiners run more efficiently too.
The U.S. already imports a large amount of heavy oil from Mexico and Canada. Energy consulting group RBN Energy estimated that U.S. refineries imported about 700,000 barrels per day of Mexican crude between January and May 2015, down from about 1.1 million barrels per day in 2011. Imports have been in decline recently as more Canadian heavy crude oil has found its way to the Gulf Coast and as Mexican oil production has tapered off.
One destination for the heavy crude could be the 340,000 barrel per day refinery Pemex owns in a 50-50 joint venture with Shell in Deep Park, Texas, RBN Energy said. In total, there’s about 2.4 million barrels per day of heavy crude processing capacity on the Gulf Coast.
Still, the total impact of 100,000 barrels per day moving in either direction would be measurable only by individual producers or refiners, said analysts at Barclays.
Barclays considered at the impact of the ruling by comparing the prices of U.S. and international benchmark oil prices. In a perfectly free market, the price of U.S. crude oil should be roughly even with the global benchmark. But in part because the U.S. doesn’t allow exports, surplus crude has built up at home and the price of U.S. benchmark blends West Texas Intermediate and Louisiana Light Sweet oils have fallen below international benchmark Brent crude. Weakening the U.S. restrictions should — all other things equal — help to close the gap.
Barclays said they’re not expecting a major shift.
“In our view, these swaps should not substantially change U.S. imports of Mexican heavy crude oil,” analysts said in a note to clients. “The added outlet for U.S. crude oil… is unlikely to alter differentials to alter differentials for U.S. grades substantially.”