Brent pressured by US tripling crude to Canada

By Dan Murtaugh
Bloomberg News

U.S. oil exports are poised to reach the highest level in 28 years as deliveries to Canada more than triple, helping bring down the price of the global benchmark Brent crude relative to U.S. grades.

The shipments will rise to at least 200,000 barrels a day by the end of the year, according to Ed Morse, head of global commodities research at Citigroup Global Markets Inc. Exports were 59,600 in 2012 and haven’t averaged more than 200,000 since 1985. The U.S. restricts companies from sending American crude abroad, with Canada an exception.

The premium for Brent, used to price European and West African crude, over U.S. West Texas Intermediate narrowed to less than $8 a barrel this week from $25.53 in November. The export increase allows refiners in eastern Canada including Valero Energy Corp. and Irving Oil Corp. to replace cargoes from overseas with less-expensive U.S. oil, benefiting from the shale-drilling boom that’s pushed domestic output to the highest level since 1992.

“U.S. production is making its way across North America and increasing supplies into the Atlantic Basin,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “It impacts the availability of light, sweet crude, which in turn will affect the Brent price.”

The spread between Brent for June settlement on the ICE Futures Europe exchange and June-delivery WTI on the New York Mercantile Exchange narrowed 20 cents to $7.88 at 2:28 p.m. after reaching $7.72 in May 8, the lowest since Jan. 20, 2011. The premium may narrow to $5 before rebounding later this year, The Goldman Sachs Group Inc. said today in a report.

Higher Exports

Exports to Canada doubled in February from a year earlier to 124,000 barrels a day, the highest level since 1999, according to U.S. Energy Information Administration data. Canadian refineries might be able to process “a couple hundred thousand barrels a day” from the U.S., Adam Sieminski, the EIA’s administrator, said in an interview in Houston.

Valero expects to ship 90,000 barrels a day to its Quebec refinery in June. Irving can unload 200,000 barrels daily from rail cars on Canada’s Atlantic Coast. Imperial Oil Ltd took in 20,000 barrels a day by rail in the first quarter at its plants and Suncor Energy Inc. plans to finish a rail terminal at its Montreal refinery by the end of the year.

Improved use of directional drilling and hydraulic fracturing in shale formations in North Dakota and Texas has helped the U.S. reverse a decline of crude output. The U.S. pumped 7.37 million barrels a day in the week ended May 3, the most since February 1992, EIA data show.

Cushing Glut

Booming production created a glut of crude in Cushing, Oklahoma, the delivery point for WTI futures. Supplies there reached a record of 51.9 million barrels in the week ended Jan. 11. WTI prices, which averaged a slight premium to the European benchmark before 2011, sank to an average $17.47-a-barrel discount last year.

Refineries in Eastern Canada have been cut off from the growth of bitumen and light synthetic oil production in the country’s western half. Enbridge Inc. is trying to remedy that by reversing its Line 9 to carry crude east to Montreal from Sarnia, Ontario. TransCanada Corp. is proposing to convert 1,800 miles (2,896 kilometers) of natural gas pipelines to carry crude from Western Canada as far east as New Brunswick.

As U.S. crude discounts persist into a third year, producers such as ConocoPhillips have called for the U.S. to change its export policy, which requires companies to obtain Commerce Department approval before sending unrefined crude abroad. The department’s policy is to approve shipments to Canada, according to its Export Administration Regulations.

Gasoline Prices

The government probably won’t change export rules while parts of the country still pay $4 a gallon for gasoline, said Stacey Hudson, a senior research associate with Raymond James & Associates Inc. in Houston. Shipments to Canada are a way to tap into a foreign market while avoiding that debate.

“The politics of sending crude to another country other than Canada get people’s feathers ruffled,” she said.

Gasoline at the pump, averaged nationwide, has risen to $3.56 yesterday from $3.291 a gallon on Jan. 1, Heathrow, Florida-based AAA, the largest U.S. motoring group, said yesterday on its website. The average price reached a 2013 high of $3.786 on Feb. 26. Prices were $4.244 a gallon in Chicago, $4.073 in San Francisco and $3.814 in New York, according to AAA.

The Commerce Department’s Bureau of Industry and Security issued 66 licenses to export crude from the U.S. in 2012, up from 45 in 2011 and 22 in 2007. A license is good for one year and allows a company to export a set amount of crude, said Eugene Cottilli, a Washington D.C.-based spokesman for the agency.

Valero License

Valero is allowed to send 90,000 barrels of Eagle Ford crude a day to its Quebec City refinery. It processed the first test batch in April to positive results and shipments will begin after the refinery completes a turnaround in June, Chief Executive Officer Bill Klesse said in a May 2 interview following the company’s annual meeting in San Antonio.

The refinery also expects to complete a rail unloading terminal and begin receiving 30,000 to 50,000 barrels a day there in July. When Enbridge completes its reversal of Line 9 to move crude to Montreal in 2014, Valero will back out all non- U.S. imports at the 235,000-barrel-a-day plant, Klesse said.

“When all that’s done, the Quebec refinery will be a North American-sourced refinery, where today we are running Saharan, CPC, North Sea, West African,” Klesse said.

Reconnecting Benchmarks

Canada averaged 676,000 barrels a day of light crude imports in 2012, according to data compiled by the country’s National Energy Board.

U.S. exports and light synthetic crude from western Canada could replace 200,000 barrels a day of European and African imports this year, and as many as 400,000 barrels a day by the end of next year after the Line 9 expansion, said Amrita Sen, chief oil market analyst for Energy Aspects Ltd. in London.

“Ultimately you are lowering your demand for crudes from the North Sea and West Africa,” she said. “It can weigh on Brent prices, whereas the more the U.S. exports, it is better for U.S crude, so it will help to reconnect the two benchmarks, a little by lowering Brent, and a little by pushing WTI up.”

Irving’s Saint John refinery in New Brunswick uses more oil from North Dakota than any other plant, Mike Ashar, the company’s then-president, said March 20 during a presentation in San Antonio. Irving has also brought in Eagle Ford crude from Texas on vessels, he said.

Imperial Shipments

Imperial received 20,000 barrels a day of North American mid-continent crude by rail at refineries in Ontario and Alberta in the first quarter and expects that number to increase, the company said April 29 in an earnings statement.

Suncor expects to complete a rail unloading operation at the 137,000-barrel-a-day Montreal plant by the end of this year, Chief Executive Officer Steve Williams said in a March 5 interview in Houston.

The arrival of U.S. oil in eastern Canada may displace higher-priced local oil pumped from fields off the coast of Newfoundland. Three tankers are set to take crude from Newfoundland to Europe in May, bringing the total for the year to four, according to shipping-fixture data compiled by Bloomberg. That’s up from two in 2011 and one last year.

The Genmar Spartiate, chartered by Exxon Mobil Corp., is en route from Whiffen Head in Newfoundland to Le Havre, France, according to satellite tracking data from AISLive on Bloomberg. Valero has chartered the AST Sunshine to load May 23 from the East Coast of Canada to Pembroke in the U.K., where the company has a refinery. Royal Dutch Shell Plc booked the Ioannis from Whiffen Head May 15 to Tranmere in the U.K.

Ship-charter data are incomplete and bookings are often reported at the provisional stage, meaning they are subject to cancellation.