The Swing Producer, the US Gulf Coast, and the US Benchmarks – The Missing Links
This comment explores the links between Saudi Arabia’s export policy, US oil market balances, and the price dynamics of US benchmarks. The authors argue that one of the biggest surprises to the market has been the resilience of US crude import despite falling US prices. As a result, the fate of US benchmarks is not just linked to US production growth and infrastructure logistics such as pipelines and rail, but also to a development that could impact global oil markets –whether Saudi Arabia decides to defend prices by reducing production should other producers increase output or relinquishes its role as the swing producer and becomes protective of its market share. Should market fundamentals weaken enough and Saudi Arabia decides to maintain its output at current levels, the US Gulf Coast (USGC) remains the lowest cost option for signaling global intentions, and the damage to prices can be confined to one part of the world. As the oil glut in the US intensifies, the debates surrounding exports of light grades from the US, or at the very least, swaps of Eagle Ford lights with Mexican Maya, are likely to gain traction in 2014. The issue then becomes whether it is US crudes, particularly light grades, that disconnect severely from the rest of the world once again or would the rest of the world share the impacts of growing US production as more crude becomes globally available. So far, US policymakers have avoided the controversial and politically sensitive issue of whether to allow exports of light crude. This issue however cannot be kept under wraps for much longer.