Since the U.S. government lifted the ban on crude exports at the beginning of 2016, Houston has become a major center in the physical oil trading world. The country’s main pricing point has shifted from Cushing, Oklahoma to Houston, Texas, reflecting changing domestic market dynamics and the impact of the country becoming an energy superpower.
Crude produced in the U.S. is attractive to customers overseas because of its high quality and its discounts to crudes traded on international markets.
Throughout this year, U.S. crude exports have soared, and have at times passed 2 million barrels per day (mbd). For the first three quarters of 2017, the U.S. exported just under 1 mbd, up by 57 percent year-on-year. Crude produced in the U.S. is attractive to customers overseas because of its high quality and its discounts to crudes traded on international markets. Furthermore, the U.S. can provide a stable source of supply, unlike a number of petrostates that are prone to instability.
This export boom has benefited Houston tremendously. The corporate center of the energy industry in the U.S., Houston has adapted to the changing physical market with expanded infrastructure and it can adequately handle exporting large volumes. Moreover, the city is near key sources of shale production in the Permian and the Eagle Ford, making it an ideal pricing point. Market participants say that Houston West Texas Intermediate (WTI) is a more representative indicator of the U.S. crude market than WTI at Cushing, which can be easily distorted due to bottlenecks and its land-locked location. Houston WTI is favorable because it is priced near the water and closely follows Brent, the international benchmark. Futures exchanges have taken note of Houston’s rising relevance. The CME Group and the IntercontinentalExchange (ICE) have seen a sharp increase in the number of trades for contracts that track the difference between Houston and Cushing prices. Price reporting agencies Platts and Argus have launched assessments for Houston WTI in the past few years to help the industry accurately evaluate the area’s market conditions.
U.S. sales of crude to foreign customers have reached far and wide this year.
U.S. sales of crude to foreign customers have reached far and wide this year. In September, for instance, U.S. crude went to 18 different countries. China, South Korea, India, the UK, and the Netherlands were main buyers. The surge in U.S. crude exports has come at an opportune time: It has helped offset OPEC’s production cuts and has dampened volatility in the global oil markets. Without the ability to export, the U.S. domestic market would likely see major price distortions similar to what occurred before the ban was lifted. Today’s liberalized market provides producers with the incentive to increase output.
Houston’s role as a trading hub is also important in refined products. In fact, gasoline and other fuels have been the top export this year from the Port of Houston. The structural shift in the U.S. refined products markets this decade (the U.S. has become a net exporter) has benefited consumers, the refining industry, and the country’s trade balance. With the U.S. refining sector expected to export large quantities of diesel and gasoline for the foreseeable future, Houston will also remain relevant in these markets.
Despite the growth in exports, the U.S. still imports more than 7 mbd of crude oil, with more than a third coming from OPEC countries.
The boom in crude exports and the increased relevance of Houston in the trading world are indicators that show significant improvements in energy security: Net imports of crude and refined products recently fell below 2 mbd, compared to times when it passed 13 mbd last decade. But it’s important to keep the changes in context. The U.S. still imports more than 7 mbd of crude oil, with more than a third coming from OPEC countries. And despite the domestic supply revolution that has occurred this decade, it’s uncertain for how long shale supply can grow. Moreover, U.S. consumers are and will continue to be vulnerable to global oil market volatility that stems from factors outside our control—OPEC production policy, emerging market demand, and instability in major oil-producing states.