Upcoming SPR refill boosts US sour crude prices

The price gap between US Gulf medium sour crude and light sweet crude is narrowing as the US purchases more supplies to replenish its Strategic Petroleum Reserves (SPR), and Opec+ continues to cut production.

The Argus Sour Crude Index (ASCI) price discount to Argus WTI Houston averaged 29¢/bl for the August trade month that ended 25 July. This compared with around $1.60/bl for July trade, and $2.15/bl and $5.15/bl for second and first-quarter deliveries, respectively.

This dramatic shift in pricing comes as the US Department of Energy (DOE)looks to replenish SPR inventories following last year’s 180mn bl emergency drawdown. Purchases for the replenishment program so far range from August-November, with around 3mn bl to be purchased for each month. Solicitations have requested US-produced sour crude grades, and market activity suggests that the ASCI grades will provide supply for the SPR refill.

SPR purchases have supported ASCI-grade Southern Green Canyon (SGC), which is delivered to Texas City, Texas, or the Nederland/Port Arthur area near Beaumont, Texas, via Genesis Energy’s Cameron Highway Oil Pipeline System (CHOPS).

So far, each DOE crude purchasing request has been for delivery to the Big Hill SPR site, which is located near where SGC comes ashore at the eastern delivery point of CHOPS.

SGC’s discount to WTI Houston averaged 64¢/bl for August delivery, from about $2/bl for July trade.

But Louisiana-delivered ASCI crude grades have been rising in value as well. August Mars averaged 13¢/bl under WTI Houston, narrower by around $1.35/bl compared with July trade. Meanwhile Poseidon was 59¢/bl below WTI Houston for August delivery, from about $2/bl for July.

Strong high sulfur fuel oil (HSFO) prices boosting heavier crude grades at the Gulf coast are also bullish for the medium sour grades. The ASCI grades also compete with blends of light Permian production and heavy Canadian crude, and medium crude yields high amounts of residual fuel oil compared with light grades like WTI.

Global support for US sour crude

A volume-weighted average of deals for the three US Gulf deepwater sour crude grades comprise the ASCI benchmark price, the basis price for crude imports from Saudi Arabia, Iraq and Kuwait.

Cuts in Opec+ sour crude availability is also supporting the ASCI grades, even though US dependence on these grades is not what it once was.  

Early this month, Saudi Arabia extended its 1mn b/d crude production cut into August from July. Saudi Arabia had already agreed to reduce production by 500,000 b/d starting in May, as part of a 1.16mn b/d Opec+ cut agreement through the end of the year.

Opec+ member Russia announced the same day that it would cut August exports by 500,000 b/d, on top of a 500,000 b/d cut that started in March.

The US has only imported around 1mn b/d bl from Opec+ countries on average this year through April according to the US Energy Information Administration (EIA), comprising around 16pc of total imports. This includes around 650,000 b/d of ASCI-priced imports from Saudi Arabia, Iraq and Kuwait, only about 225,000 b/d of which went to the US Gulf coast region, according to EIA data. In 2014, the last full year before the US resumed crude exports, Opec+ supply accounted for 41pc of US crude receipts.

Author Amanda Smith