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OPEC who? US oil producers are moving into the Asian market

  • In a shakeup to the established order, U.S. crude oil exporters are moving more cargoes toward Asia
  • Exports from U.S. "tight oil" extracted from shale formations alone may swell to over 3 million barrels a day by 2022 — with a third of that volume absorbed by Asia, said one economist
Workers aboard a Shell platform in 2013 as it sails away for the Mars B Field in the Gulf of Mexico.
Eddie Seal | Bloomberg | Getty Images
Workers aboard a Shell platform in 2013 as it sails away for the Mars B Field in the Gulf of Mexico.

Mars and Poseidon are coming to Asia.

That is, those two varieties of U.S.-produced crude oil are spearheading American exporters' direct challenge to OPEC for market share in Asia.

In a shakeup to the established order, U.S. crude oil exporters are moving more cargoes toward high-growth Asia as they capitalize on favorable price differentials and as supply curbs by the Organization of Petroleum Exporting Countries force Gulf producers to withdraw from their traditional demand heartland.

That's good news for Asian buyers who benefit from a more diversified basket of crude oil on offer and as competition between suppliers drives down prices.

"See it as a bigger buffet table for Asian refiners who have more supply options and sellers to engage with," said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years.

India received its first American oil cargo of 1.6 million barrels on Oct. 2, the result of Prime Minister Narendra Modi's visit to the U.S. in June where he negotiated contracts to supply three Indian refineries with nearly 8 million barrels.

'Markets 101'

All of this change was kicked off when the Obama administration lifted a 40-year-old ban on exporting domestic oil in December 2015.

Now, more U.S. crude is on the way if market economics stay favorable.

One of the decisive factors dictating global oil flows is the price gap between two international benchmarks: Brent crude oil and U.S. counterpart West Texas Intermediate. Typically, the higher Brent's premium is over WTI, the stronger the pull for lower-priced U.S. crude from outside buyers.

The gap between Brent and WTI hit its widest level in two years in early October at over $6.00 a barrel. That spread "is the one everyone hones in," said Driscoll, though other differentials are also closely monitored by oil traders for clues generating possible arbitrage leads, as is the gap between U.S. Mars crude oil – increasingly seen as a key export grade – and WTI.

And exporting is an increasingly popular option: U.S. crude exports rose to a record 1.98 million barrels a day in the week ending September 29.

That's "classic Oil Markets 101," said Michael Wittner, head of oil research at Societe Generale, "too much crude in the U.S. and too little crude elsewhere means that U.S. prices weaken relative to global prices, and exports increase to address the imbalance."

OPEC on notice

Exports from U.S. "tight oil" extracted from shale formations alone may swell to over 3 million barrels a day by 2022 — with a third of that volume absorbed by Asia — said Ed Rawle, chief economist at Wood Mackenzie.

That signals a change in the energy world order as OPEC influence wanes. Some energy commentators believe the fracking boom has helped the U.S. take the title of the world's "swing" producer from Saudi Arabia. The Americans, it's thought, now possess the capacity to respond to fluctuations in market demand.

As tankers laden with U.S. crude move eastwards, OPEC is sure to take notice.

"Traditional OPEC suppliers will need to watch this space and price their crude competitively as up to 50 percent of incremental crudes into Asia could come from non-OPEC," Rawle said.

Whether more U.S. crude gets shipped east will hinge on how fast capacity can be added to key U.S. export terminals such as the Louisiana Offshore Oil Port, America's only deep-water tanker port in the Gulf of Mexico.

"The emergence of the U.S. as a significant exporter to Europe or Asia will only be progressive and contingent on the development of Gulf Coast export capacity and crude price differentials remaining favorable," said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas. "For now, these exports remain opportunistic."