In early June, the U.S. Energy Information Administration (EIA) released its latest outlook for U.S. oil production — raising its outlook for U.S. supply and surpassing the 2019 high in the third quarter of 2023. This contrasts with the recent focus on the headwinds facing producers: weather-related disruptions, lack of investor interest, supply chain disruptions, rising costs and labor shortages were all mentioned.
Disappointing production levels mask a long-term trend: North American crude output is expected to continue climbing. U.S. Gulf Coast WTI exports are poised to hit a new record as production grows, midstream infrastructure expands since 2018, and North American refining systems shrink.
Production growth slope uncertain
The debate over production growth is a key factor in how and when a global shortage of crude and refined products will lead to record oil price gains. Growth in the U.S. in 2022 is estimated to be between 0.8 million barrels per day (BPD) and 1.8 million barrels per day (BPD), with most of it occurring in the second half of the year. By the end of 2024, an additional 500,000 to 1 million bpd is expected. Crude and condensate production in Western Canada has already surpassed pre-pandemic levels and could grow by more than 500,000 bpd by 2024 from a peak in 2019. While most major countries are adding production to their basins, the Permian leads the pack with nearly 5 million bpd of supply and will add another 1 to 2 million bpd by 2024.
Adequate piping capacity
Major pipeline operators in the Permian, including Plains All American, Magellan Midstream and Enterprise Products, noted in their latest investor materials that system utilization is rising, and forecasts through 2025 still emphasize spare crude pipeline capacity in the region. Regional prices for light sweet crude also reflect ample headroom for production growth, with the Argus WTI Midland and Argus WTI Houston futures curves being close to NYMEX WTI and each other. In 2018, shale oil production outstripped pipeline construction, filling up regional storage tanks, causing the recent price of Argus WTI Midland to hit a low of -$17.43 a barrel on August 30.
As the pipeline expands, the spread narrows. Since then, more than 5 million barrels per day of pipeline space have been added, most of which connect production directly to the Gulf Coast. Production delivery capacity from Western Canada to the Gulf Coast has also been expanded.
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Oil exports expected to rise
While there are ample pipelines to carry growing oil production to the Gulf Coast, there is little room for refiners to consume more output there. Refining capacity on the Gulf Coast has shrunk since the last peak in oil production. Two major refineries in Louisiana closed in 2021, and a third in Houston is scheduled to close in 2023, for a combined loss of about 750,000 bpd.
Without local demand, much of the growth in the Permian Basin and Western Canada will need to go to export terminals on the Gulf Coast. RBN Energy estimates the effective capacity of regional export terminals at 6 million barrels per day, with room to grow from current levels. Exports averaged 3.7 million bpd in the four weeks to May 27, up from 2.7 million bpd in the first quarter and matching the previous high. While seasonal refinery maintenance and the withdrawal of the Strategic Petroleum Reserve (SPR) may temporarily boost exports, production forecasts suggest that North America may have another 2 to 2.5 million barrels per day (bpd) of crude supplied to the global refining market over the next 24 months.
WTI is a leader in waterborne export growth
With exports expected to climb to 5 million barrels per day in the next few years, the U.S. Gulf Coast is expected to become the second-largest producer of waterborne crude after Saudi Arabia. While exports of heavy crude from Western Canada will also increase, most of the growth will come from the Permian Basin light, sweet crude.
The Texas regional benchmark for this crude — WTI Midland and Houston’s Midland-size WTI — is already the most active U.S. market outside of the global WTI benchmark, with more than 7 million daily futures contracts traded in May bucket. WTI’s growing interest in European and Asian refiners will see WTI Midland take a growing share of its refineries, especially as Russian exports and North Sea light crude production are expected to decline Down. Platts’ assessment of the European North Sea benchmark announced the inclusion of the WTI Midland grade in outdated Brent, underscoring the importance of WTI’s overseas prices.
Uncertainty over the pace and timing of North American production growth is troubling when inventories are tight and prices remain high, but growth is coming. Unlike 2018, there is little uncertainty about the midstream industry’s ability to transport production where it is needed. As production grows, WTI from the U.S. Gulf Coast will be increasingly supplied to alleviate shortages and will inevitably take a larger share of global refineries.
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