HOUSTON (Reuters) - With the end of the U.S. oil export ban approaching, traders of physical crude have been scouring the globe and poring over shipping rates to exploit what they hope will be the biggest new arbitrage in years: selling domestic crude abroad.
The trouble is, they can’t seem to make the math work; and analysts say it could be months if not years before U.S. crude flows to foreign markets in any significant volume.
Most dealers welcomed the likely end to a ban that restricted opportunities in recent years to export relatively inexpensive U.S. crude to higher priced international markets. But now traders in the opaque physical crude market say they cannot find any overseas buyers in the current depressed global price environment.
While lawmakers in Washington debated whether to lift the export ban for the past several years, global oil prices have slumped and a reversal in booming U.S. production has sharply reduced the need for exports.
For instance, just a year ago U.S. benchmark WTI crude was $5 a barrel cheaper than global benchmark Brent. On Wednesday, however, WTI for delivery from February through May was trading at a premium to Brent, the first time that has occurred since 2010.
“In the current supply-demand environment, there’s no arbitrage to incentivize moving it,” John Auers, Executive Vice President at energy consultancy Turner Mason & Company.
In what now appears to be a largely symbolic gesture, U.S. lawmakers agreed to repeal the 40-year-old limits as part of broader tax and spending legislation. The decision is a victory for cash-strapped producers who have fought for its removal, but not yet a bonanza for arbitrage traders.“It doesn’t work right now. Nobody is exporting with the arb positive,” a trader said.
Congress enacted the ban on U.S. oil exports following the 1973 Arab oil embargo, which sent domestic gasoline prices soaring.
Auers, who has looked at where crude would go, said if exports are permitted, small volumes may move, but without a structural shift in the market, large flows of oil out of the United States are unlikely.
While the chances of a wave of U.S. shipments are low, traders and analysts said there may be new opportunities to export crude to certain countries at various times.
For instance, countries like Venezuela and Brazil have become bigger buyers of similar light-sweet West African crudes recently, and Asian refiners have occasionally purchased Alaskan crude, one of the few exceptions to the export ban. Those exports were permitted in 1996 to boost the state’s sagging oil industry.
Europe and Latin America are the most likely destinations for U.S. crude, according to a report from Turner, Mason & Co, but determining what spread between U.S. benchmarks and international grades is needed for a profit is tricky. Most overseas refiners are not set up for U.S. crudes and tanker rates are hard to figure on rarely used shipping routes.
Traders estimate that the flat rate is between $1.3 to $1.4 million to ship an Aframax tanker, which carries roughly 600,000 barrels of crude, from the U.S. Gulf Coast to Europe. This means it costs roughly $16.25 per tonne, or roughly $2.22 per barrel, to send crude on a Transatlantic journey.
At the moment, U.S. Light Louisiana Sweet crude, considered a likely candidate for export, is trading at parity with Europe’s Brent, leaving no gap to cover transport costs.
“We must still keep in mind that lifting the export ban does not change the fundamentals in today’s market,” according to Sarp Ozka, a senior energy market analyst with Ponderosa Advisors, a boutique energy, agriculture and water advisory firm based in Denver, Colorado.
Even if spreads between U.S. crudes relative to worldwide grades widen, demand for light oil in the United States may warrant keeping those barrels at home. Oil production is slated to fall by 570,000 barrels per day next year, according to the most recent estimate from the EIA.
At the same time, the U.S. is still importing significant volumes of oil, an indication of domestic demand for certain crude grades and sign that refiners will continue to exploit the cheapest oil available, including foreign imports. The prolonged rout in oil prices is expected to prompt more production declines.
“It really doesn’t matter if we have an export ban or not because we need all the light tight oil we’re producing,” according to David St. Amand, president Navigistics Consulting, a maritime consultancy.
U.S. oil imports rose to 7.9 million barrels a day the second week in December, the highest level in nearly a year, according to the Energy Information Administration.
Lifting the ban could eliminate inefficiencies in the market, according to Michael Cohen, an analyst with Barclays, allowing traders to take advantage of arbitrage opportunities as they arise.
“There should be that optionality in the long-term,” he said. “That’s why it matters.”
Reporting by Liz Hampton with additional reporting from Jessica Resnick-Ault; Editing by David Gregorio
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