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U.S. refiners using most domestic oil in 29 years

Refineries in the United States are relying on domestically produced crude oil now more than any other time since 1986. Domestic production and imports from Canada and Mexico made up 85% of crude processed at U.S.  plants in January, the most since March 1986, reports Bloomberg.

Crude output in the U.S. has surged due to the shale revolution, transforming the country into the world’s third-largest crude producer. Rising supplies have helped to cut crude prices by more than half last year with West Texas Intermediate (WTI) falling to $42/bbl last month from a high last year of $108/bbl. The U.S. benchmark crude has also averaged a $6.26 discount to the international benchmark, Brent crude oil.

Growing spread

New research from Kenneth Medlock III from Rice University found that the discount of WTI in comparison to Brent has occurred in conjunction with increased production in the United States. “The relatively recent discount of [WTI] to a global benchmark – such as Brent – has occurred concomitant with U.S. domestic production growth,” says the report, titled “To Lift or Not to Lift?”

Based on WTI’s API and sulfur content, it should actually trade at a premium to Brent, the research finds. Medlock and his research team found that the discount is due in part to the export ban in place in the United States. “Even in a low international crude oil price environment the importance of addressing the export ban is very high with discounts reaching as high as $8.00 per barrel in a $50.00 [per barrel] world.”

Because light oil producers are unable to sell their product abroad, they choose instead to discount their oil and make it appealing to refiners whose operations are focused more on heavier crudes. “Since domestic producers of light crude oil have no other option to sell their crude, they can either discount the price to be competitive at the margin defined by the medium crudes or shut in production.”

Medlock’s research suggests that lifting the ban on crude exports would eliminate the discount seen on U.S. crude oils. Lifting the ban would allow excess light crude oil to be exported, reducing the discount needed to keep it competitive at U.S. refineries. “To Lift or Not to Lift,” also asserts that removing the ban would improve U.S. energy security by creating more stable global oil pricing without raising gas prices, which are governed more by international prices.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.