End of export ban frees WTI Houston

OREANDA-NEWS. January 20, 2016. The end of the US oil export ban last month has lifted the restraints off of US light sweet production prices, sending a key benchmark to premiums over both Ice Brent and Light Louisiana Sweet (LLS).

Prior to the removal of export restrictions on 18 December, WTI Houston — which represents the value of light sweet shale production at the US Gulf coast — traded at a discount to Ice Brent. The strongest WTI Houston ever got to Ice Brent since Argus launched the quote in late February 2015 was a discount of 12?/bl.

But with the end of restrictions on US crude exports last month that changed. WTI Houston has been at a 26?/bl to \\$1.77/bl premium to Ice Brent since 22 December. The WTI Houston/Brent premium was bound between 40?/bl to 80?/bl from 23 December through 12 January but jumped to \\$1.77/bl and \\$1.42/bl as February Ice Brent approached expiry. Ice Brent rolled to March on 15 January.

In the past a WTI Houston premium to Brent was unlikely because it could have attracted light sweet imports to the US Gulf coast at the expense of domestic producers who had no other outlets. Now, if US buyers import light sweet crude to the US Gulf coast, domestic producers have potential alternatives in overseas markets — even if such options are for now economically constrained.

Under the export ban, WTI Houston was also at a discount to LLS in every session. The narrowest discount — 20?/bl — occurred on 25 June 2015, the end of the trade month when spreads tend to be more volatile as traders settle volumes for the following delivery month.

If Texas production were priced too close to or higher than LLS, shipments from Texas to Louisiana would slow, leaving Texas producers unable to find sufficient demand for domestic volumes. WTI Houston remained at a discount to LLS as a result.

Before the lifting of export restrictions, LLS tended to adjust to the discount of Nymex WTI to Ice Brent in order to keep light sweet imports from coming to Louisiana, while WTI Houston adjusted to LLS to keep Texas production flowing to Louisiana. LLS did trade at a premium to Ice Brent, in rare instances and on a temporary basis.

Since the repeal of the ban WTI Houston has ranged from a discount of 80?/bl to a premium of 24?/bl to LLS, and as of Monday was at a premium of 25?/bl to 65?/bl to LLS.

Louisiana may begin importing light sweet crude, but Texas producers now have other potential outlets.

Given how recently the export restrictions ended, it's difficult to say if WTI Houston's premiums to Brent and LLS will persist. The market has yet to fully adjust to the new legal structure, especially given increased uncertainty and oil prices near \\$30/bl.