Tuesday, April 4, 2017

LOOP Sour crude oil benchmark reflects imports, exports needed by USGC refiners

Top 10 USGC-imported crude grades, 2016


By John-Laurent Tronche, managing editor, Americas crude

Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.

The US oil industry is fast approaching the 10-year mark in an unprecedented renaissance. Driven by technological advancements in drilling, crude oil production has reached new record highs and currently hovers around 9 million barrels-per-day, up roughly 70 percent from 2007.

Nearly 75% of US crude output is not a grade typically consumed by a majority of domestic refiners

But nearly three-quarters of that oil production is light sweet crude oil or condensate – the kind of crude oil a majority of US refiners typically do not consume.

Gulf Coast refiners, whose combined capacity of 9.6 million b/d makes up more than half of the US total, are still largely consumers of medium-to-heavy sour crude. While imports of light sweet crudes have tumbled, USGC refiners continue to import significant volumes of heavy sour and medium sour crude.

With so much heavy-to-medium sour crude consumed on the US Gulf Coast, this presents a problem for those wishing to find a pricing benchmark in the region. The current US crude benchmark is the NYMEX light, sweet crude futures contract, which is delivered in the Midwest, at Cushing, Oklahoma. The contract, while very liquid, does not reflect the typically consumed grade and correct location for Gulf Coast refiners.

Plenty of medium-sour crude is produced off the US Gulf Coast and imported into the region. Why not look there?

Platts launches daily price assessments of LOOP Sour, a medium-sour blend of several grades (Platts symbol AALSM01)

This week Platts launched daily price assessments of LOOP Sour, a medium-sour blend of several grades, domestic and imported, stored in one of the eight underground caverns at the Louisiana Offshore Oil Port, also known as LOOP.

The two domestic US crude streams are Mars and Poseidon, and the three Middle-Eastern crude import grades are Arab Medium, Kuwait Export Crude and Basrah Light.

As a blend, LOOP Sour represents a diverse and growing set of market participants involved in the buying and selling of the blend components as well as the final blend itself, ensuring that the price cannot be easily influenced by a small number of producers. A LOOP Sour storage auction and secondary market also provide unique visibility and helps LOOP Sour meets the industry’s need for a versatile and robust benchmark.

The US Gulf Coast is an ideal location for a new sour crude pricing benchmark. The LOOP facility itself has pipeline access to more than 2.5 million b/d of refining capacity in Louisiana, as well as refineries in Texas and as far north as the Midwest.

This does not mean that West Texas Intermediate will no longer be a benchmark or a useful hedging tool, but it does encompass different basis risks in terms of location and crude quality for companies trading sour crude on the Gulf Coast.

LOOP Sour includes imports that continue to comprise a key portion of US refining crude slates

LOOP Sour not only encompasses the price of domestic sour crude barrels, but also imported sour crude barrels that continue to comprise a key portion of US refining crude slates — allowing for a more robust pricing benchmark.

Until next time on the Snapshot, we’ll keep an eye on the markets.