By the end of the year, the US could be exporting as much as 500,000 b/d of crude and possibly more, even if current restrictions on US exports remain in place, several prominent analysts said Monday.
But beyond that, US drillers would seriously struggle to find a market for their surging crude production, as exports remain constrained and US refiners lack optimal processing capacity for domestic oil, the analysts said on a panel discussion hosted by the Center for Strategic and International Studies.
The oversupply could then cause US crude prices to plunge and production to be shut in, they said.
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"Sooner or later, given production growth, more exports need to be considered," said Ed Morse, Citi Research's global head of commodities.
The US exports around 200,000 b/d to Canada under an exception to the restrictions imposed by Congress in the wake of the 1973 Arab oil embargo, which otherwise largely bans all US crude exports. In addition to allowing some exports to Canada, the law allows exports of Alaskan North Slope crude.
Analysts on the panel said they expect exports to Canada to double by year's end to at least 400,000 b/d.
In addition, with crude-by-rail capacity on the US West Coast being built out, Morse said he sees Western Canadian, Bakken and Mexican crude displacing ship-borne Alaskan crude in western US refineries.
That would free up to 100,000 b/d of Alaska North Slope crude to be exported, likely to South Korea, which has tax-advantaged crude import rules, he said.
But without some relaxation of the export ban, even exports to Canada could suffer and US overproduction could become a real issue, the analysts said.
Michael Cohen, lead Americas oil market analyst at Barclays, said that WTI prices below $80/barrel would threaten Eagle Ford production, the source of much of the US' growth in crude production.
"It may not happen in the next few years, but [a crude oversupply] will become an issue with producer hedging," Cohen said. "It does have an impact on investment strategy."
Cohen noted TransCanada's proposed Energy East pipeline and Enbridge's proposed Line 9 reversal to bring Albertan crude to Canada's eastern refineries are under review by Canadian officials and, if approved, would likely displace imports of US crude.
"That opportunity [for US crude exports to Canada] exists probably for just a few years, and after that, it may not be as much as before," he said.
On the refinery side, the industry has announced about 400,000 b/d of new capacity to process light, sweet domestic crude and condensates.
But most of those projects will not come online until the end of 2015, and some may not be built at all, depending on economics, the analysts said.
Roger Diwan, senior director at IHS Energy Insight, noting that refineries in PADDs II and III -- the Midwest and Gulf Coast, respectively -- have already displaced almost all of their light crude imports with domestic crude.
Meanwhile, PADDs I and V -- the East and West coasts, respectively -- have been slower to receive domestic crude because of infrastructure bottlenecks, but those should be alleviated in the first half of this year, he added.
Diwan said with current refinery infrastructure largely optimized to run on medium crudes, mostly from the Middle East, as long as those crudes remain price-competitive, refiners will have little incentive to switch to US crude.
He noted that if all PADD III refiners swapped imported medium crudes for light domestic crudes, the average API gravity of the industry's input would exceed 33 degrees by the end of 2015, which would be problematic given the desired product slates.
"Displacing medium imports is easier said than done," Diwan said. "It would likely be challenging for US refiners to absorb the projected light crude growth."
So that leaves expanding crude exports, as the primary valve producers will seek to get their crude to market in coming years.
Eliminating the export restrictions would require the White House to declare exports in the national interest or Congress to overturn the ban. Neither is politically palatable at the moment, said Kevin Book, managing director of ClearView Energy Partners.
He noted that voters -- and by extension US politicians who want to remain in office -- remain extremely sensitive to volatility in gasoline prices.
And while allowing exports could, in theory, help stabilize global crude supply and lower the price at the pump, gasoline prices still largely track Brent prices, which can be influenced by any number of factors -- including weather and geopolitical disruptions -- that are out of the hands of politicians.
"I would hate to be a member of Congress who votes to allow exports and then sees some global event cause gasoline prices to go up," Book said.
He added that just 10 US states represent 93% of US onshore crude production.
"This isn't the majority of states," he said, meaning that the status quo likely will not change for now.
--Herman Wang, email@example.com
--Edited by Annie Siebert, firstname.lastname@example.org