HOUSTON/NEW YORK (Reuters) - U.S. crude exports are poised to pick up, analysts and traders said, as rising domestic production has pushed the discount for U.S. futures versus Europe's Brent benchmark to its steepest since the United States lifted a ban on exports in late 2015.
The discount for U.S. futures versus benchmark Brent settled at $3.02 per barrel on Monday after touching $3.07 per barrel, its widest since December 2015. That makes it more profitable for U.S. oil traders to ship crude to destinations where it fetches a higher price.
U.S. crude inventories have ballooned to a record. Growing U.S. shale production has helped limit price gains since last November, when the world's top producers agreed to rein in output. [EIA/S]
"The world is still oversupplied with light oil and U.S. inventories are at very high levels so with U.S. production ramping back up it has to find a home somewhere," said David St. Amand, president of Navigistics Consulting.
Freight rates have dipped in the last week, ship brokers and traders said, also making exports more attractive. The cost of shipping crude on the largest vessels from the Carribbean to Asia fell by about $15 million in the latest week to a lump sum of $3.8 million, while rates for Suezmax vessels on popular shipping routes were down about 2.5 percentage points of the so-called World Scale, according to ship brokers.
In late August, the discount of U.S. crude to Brent hit its widest in six months, and in September, exports surged to a record. Since then, the spread has widened even more, making it profitable to ship on the mammoth voyage from the United States to Asia. Oil majors and trading houses have rushed to export an unprecedented volume of U.S. crude.
Light sweet U.S. crude is also easier and cheaper to process than heavy crude, boosting demand in Asia, where refiners are snapping up cargoes of the oil.
Rising hedging by U.S. oil producers may allow production to keep flowing even as prices fall, analysts said. Consultancy Wood Mackenzie said Monday that producers it covers added a higher volume of oil hedges during the fourth quarter than in any of the previous four quarters, noting that companies added an annualized 648,000 barrels a day of new oil hedges.
"Those hoping that recent oil-price weakness will prompt U.S. producers to pull back drilling activity and ease the glut of oil supply may need to keep waiting," they wrote.
April shale production is expected to climb by 109,000 barrels per day, the biggest monthly increase since October, according to the U.S. Energy Information Administration.
"Growing production needs to clear. The only way to do that is to export it," one trader said.
The possibility for increased exports has put upward pressure on physical crude grades. WTI at Midland, Texas rose about 60 cents to around an 80-cent a barrel discount to U.S. crude, while Mars Sour jumped to around $1.50/bbl discount, up about 25 cents from the prior day.
Others said the arb would narrow in coming days as refinery maintenance season draws to a close and as refiners start to run more crude.
"You look at U.S. crude runs, Asian crude runs and the growing Asian appetite for light sweets - it would lead one to believe that the arb has a good chance to tighten up," said Andrew Lebow, senior partner at Commodity Research Group in Darien, Connecticut.
Reporting by Liz Hampton and Devika Krishna Kumar; Editing by David Gregorio