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Crude Swap with Mexico – The Heavy and The Light


On August 14 the Obama Administration announced that the Commerce Department would approve applications to export up to 100,000 barrels of light crude per day to Mexico in a swap arrangement for an equivalent volume of heavy crude from Mexico. This type of export has previously been available between The US and Canada, and perhaps indicates willingness to eventually repeal the crude export ban. Here’s a quick little recap and analysis of the situation.

Why is this a big deal?

After the 1975 oil shock, The United States banned the export of crude oil in order to stabilize the price. But with the current state of petroleum supply and demand, lawmakers and media from The Economist to the Daily Texan (The University of Texas’s student newspaper) are calling for an outright end to the ban. Additionally, today’s Wall Street Journal reports that lifting the export ban will not increase the price of gasoline in the U.S., and could in fact lower it.

Currently, West Texas Intermediate (WTI) (which flows through Cushing, OK) is discounted vs. Brent (which is priced in the North Sea) on the world market; ie, American Crude sells for around $5 per barrel less than all other oil. If this change in policy indicates a likelihood that the export ban will be lifted entirely, we will ultimately see that discount leveled out.

What’s getting swapped

Around the time of the export ban, many gulf coast refineries were geared up to rely on heavy sour crudes – primarily because of the abundance of that type of crude in the Middle East. More recently we have been importing additional heavy crudes from the New World – Venezuela, Mexico, Canada, etc. Since it is very expensive to re-configure a refinery for exclusively lighter crude, we still need a certain amount of heavy crude in order to fulfill the refining (and sale of) gasoline and other refined products (of which we are still the biggest producer and consumer). The “Mayan Crude” that comes out of the bay of Campeche is generally of the “sour heavy” variety of crude.

Since the Unconventional shale revolution has largely produced lighter, sweeter crudes and condensates, the global market for crude oil for has certainly been impacted. This EIA chart from earlier this year shows how imports of light sweet and light sour grades of crude for use by U.S. Gulf Coast refineries have been virtually eliminated.

swaps fig 1 crude swap

Also as the fantastic RBN Energy Blog pointed out, the US – Mexico Petroleum Trade Balance needs a little balancing.

swaps fig 2 crude swap

PEMEX, the national oil company for Mexico, is especially excited about the efficiency that the additional light sweet crude will bring to their refining operations.

Finally, as Dan Murtaugh at Bloomberg points out, “The U.S. exported a record 586,000 barrels of crude a day in April, mostly to Canada.” (Additionally, Alaskan crude from the North Slope – which is exempt from the export ban – has also been recently made available on the international market for the first time in a decade.)

Why Now?

The Obama administration probably sees the oil-swap as a win for the following reasons:

  1. Shows Democrats as pro-Latin American and pro-Latino
  2. Bolsters Obama’s image as pro free–trade and pro-exports (something he has tried to make a legacy, as with the Pacific trade deal)
  3. Dampens some of the perception that Obama is anti-oil (although good luck with that)

Lastly, the timing of the crude oil swap coincides nicely with the new rail crossing in Brownsville, TX, which will be how a lot of this oil gets shipped.

And the winners are….

In addition to PEMEX and the Gulf Coast refiners, almost certainly the biggest winners will be Eagle Ford oil-focused operators like ConocoPhillips and Pioneer, who will now gain an additional avenue for delivering their light shale crudes to market.

Your Turn

What do you think? Leave a comment below.

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Eric Roach

Eric Roach is the editor of Drillinginfo's blog, which was selected as the Top Oil & Gas Industry Blog based on visibility, engagement and relevance. He also prepares a weekly newsletter of top industry news for blog subscribers, and would be grateful if you would subscribe and tell your friends. (There's a box on the upper right of the page where you can subscribe).