Release date: October 25, 2017 | Next release date: November 1, 2017
Widening Brent-WTI price spread unlikely to change current trends in East Coast crude oil supply
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.
However, the most significant changes that have occurred since 2011–2013 include the lifting of restrictions on exporting domestic crude oil and the development of pipeline infrastructure in relatively new oil producing areas providing greater access to domestic refineries in regions other than the U.S. East Coast. In December 2015, restrictions on exporting domestic crude oil were removed, so East Coast refiners must now compete with international buyers for domestic crude oil, and pay the typically higher coastwise-compliant shipping rates for a U.S. Gulf Coast-to-U.S. East Coast tanker shipment. As a result, U.S. crude oil exports increased, averaging 893,000 b/d in July 2017, and even more recently, an estimated 1.6 million b/d four-week average for the week ending October 13. Meanwhile, in July PADD 1 crude oil tanker receipts from PADD 3 fell to 29,000 b/d, down from 159,000 b/d in July 2014. U.S. East Coast refiners are unlikely to repeat shifts in crude oil supply patterns despite the widening price difference.
U.S. average regular gasoline prices fall, diesel prices increase
The U.S. average regular gasoline retail price fell 1 cent from the previous week to $2.48 per gallon on October 23, up 24 cents from the same time last year. The Gulf Coast price fell nearly four cents to $2.23 per gallon, the East Coast price fell two cents to $2.45 per gallon, and the West Coast price fell one cent to $2.93 per gallon. The Midwest price increased nearly two cents to $2.39 per gallon, and the Rocky Mountain price increased less than one cent, remaining at $2.53 per gallon.
The U.S. average diesel fuel price increased 1 cent to $2.80 per gallon on October 23, 32 cents higher than a year ago. The Rocky Mountain price increased three cents to $2.92 per gallon, the Midwest price increased two cents to $2.78 per gallon, the West Coast price increased one cent to $3.10 per gallon, and the Gulf Coast price increased less than one cent, remaining at $2.61 per gallon. The East Coast price was unchanged at $2.80 per gallon.
Propane inventories decline
U.S. propane stocks decreased by 1.2 million barrels last week to 77.6 million barrels as of October 20, 2017, 7.2 million barrels (8.5%) lower than the five-year average inventory level for this same time of year. Gulf Coast and East Coast inventories decreased by 1.4 million barrels and 0.2 million barrels, respectively, while Midwest and Rocky Mountain/West Coast inventories increased by 0.3 million barrels and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 3.5% of total propane inventories.
Residential heating oil and propane prices continue to increase
As of October 23, 2017, residential heating oil prices averaged $2.67 per gallon, 1 cent per gallon more than last week and 27 cents per gallon higher than last year’s price at this time. The average wholesale heating oil price for this week is just over $1.89 per gallon, almost 1 cent per gallon more than last week and nearly 26 cents per gallon higher than a year ago.
Residential propane prices averaged $2.28 per gallon, just over 1 cent per gallon more than last week and 21 cents per gallon higher than a year ago. Wholesale propane prices averaged almost $1.01 per gallon, nearly 3 cents per gallon less than last week but almost 31 cents per gallon higher than last year’s price.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.
Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 10/23/17 | Week | Year | |
| Gasoline | 2.479 | -0.010 | 0.236 |
| Diesel | 2.797 | 0.010 | 0.319 |
| Heating Oil | 2.668 | 0.010 | 0.274 |
| Propane | 2.280 | 0.013 | 0.211 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 10/20/17 | Week | Year | |
| Crude oil | 51.47 | 0.02 | 0.62 |
| Gasoline | 1.678 | 0.056 | 0.147 |
| Heating oil | 1.805 | 0.008 | 0.231 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 10/20/17 | Week | Year | |
| Crude oil | 457.3 | 0.9 | -10.8 |
| Gasoline | 216.9 | -5.5 | -9.1 |
| Distillate | 129.2 | -5.2 | -23.1 |
| Propane | 77.620 | -1.217 | -22.947 |