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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