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The difference between lower U.S. domestic crude oil prices and foreign crude oil prices in the past two months is at its largest since 2015. Despite the recently widening spread, flows of domestic oil into U.S. East Coast (Petroleum Administration for Defense District (PADD) 1) refineries are not anticipated to increase unless the discount widens further.
Between 2011 and 2013, when domestic crude oil prices were significantly lower compared with foreign crude oil, refineries on the U.S. East Coast changed how they were supplied with crude oil. Over the past two months, the domestic crude oil price discount has increased to the largest it has been since 2015. The current price spread between foreign and domestic crude oil has not grown large enough, and it is not expected to last long enough for changes similar to those seen between 2011 and 2013 which require long-term investments and commitments.
Before 2011, refineries on the U.S. East Coast typically processed imported crude oil because transportation options for sourcing domestically produced crude oil were limited and relatively expensive. The Brent-West Texas Intermediate (WTI) spread—the difference between Brent, the international crude oil price benchmark, and WTI, the U.S. crude oil price benchmark—indicates the value of each crude oil and the many crude oils priced relative to each benchmark. For U.S. East Coast refineries, the Brent-WTI spread can partially determine when switching to domestic crude oil would be more profitable.
Between 2011 and 2013, U.S. crude oil production grew faster than transportation, storage, and refining capacity could accommodate, and restrictions on exporting domestically produced crude oil resulted in WTI prices averaging $15 per barrel (b) below Brent (Figure 1).
The large and prolonged domestic crude oil price discount from 2011 to 2013 prompted East Coast refineries to source domestic crude oil by coastwise-compliant shipping arrangements and by investing in crude-by-rail projects, among other means. In 2014, East Coast refineries received 230,000 barrels per day (b/d) of domestic crude oil by rail, most likely Bakken crude oil from the Midwest. In 2015, East Coast refineries received 328,000 b/d of domestic crude oil by coastwise-compliant tanker, mostly from the U.S. Gulf Coast (PADD 3) (Figure 2).
These investments resulted in a major shift in East Coast crude oil supply trends. In January 2014, domestic crude oil receipts equaled receipts of foreign crude oil into East Coast refineries for the first time. Domestic crude oil receipts accounted for as much as 60% of total East Coast refinery crude oil receipts in February 2015. However, as the Brent-WTI spread narrowed throughout the rest of 2015 and remained narrow (with Brent averaging $0.39/b more than WTI) in 2016, the price advantage of domestic crude oil over foreign crude oil for East Coast refineries declined. East Coast refiners responded by not renewing or canceling the domestic crude oil supply contracts they had made in previous years, resulting in domestic crude oil receipts decreasing at East Coast refineries, down to 9% of total receipts in July 2017 (Figure 3).
In late 2017, the Brent-WTI spread began to widen again, with Brent averaging a $6.25/b premium to WTI in September. However, the reopening of the Brent-WTI spread does not appear to be sufficient to induce East Coast refiners to purchase domestic crude oil. The domestic crude oil sources that East Coast refiners had been buying also now have other outlets.
Despite the investment in crude-by-rail facilities already made by East Coast refiners and suppliers, the costs associated with transporting crude oil by rail from the Midwest (PADD 2) to the U.S. East Coast are likely greater than the current $5/b Brent-WTI spread. Also, crude-by-rail movements are typically arranged on the basis of long-term supply contracts that can vary in costs and duration—meaning any temporary widening of Brent-WTI spread is unlikely to prompt a significant, near-term increase of domestic crude-by-rail to East Coast refiners.
Domestic crude oil’s access to pipelines has also changed since 2011–2013, particularly in the Bakken, the source of most of the crude oil transported by rail. With the opening and expansions of pipelines such as the Dakota Access, the Enbridge pipelines, and others, Bakken crude oil gained increased access to refineries in the rest of the Midwest and the Gulf Coast, reducing the need to move crude by rail.
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