The U.S. oil industry has experienced a remarkable transformation in the past decade, thanks to the shale revolution that has unlocked vast amounts of oil from the tight and low-permeability formations, using horizontal drilling and hydraulic fracturing technologies. The shale revolution has enabled the U.S. to become the world’s largest producer and exporter of oil, and to achieve energy independence and security. The shale revolution has also created economic and environmental benefits, such as lower oil prices, higher revenues, more jobs, and lower emissions.

But the shale revolution has also brought new challenges and opportunities for the U.S. midstream industry, which consists of the companies that gather, transport, store, and market the oil and its byproducts. The midstream industry has to cope with the fluctuations and the shocks of the global oil demand and supply, such as the COVID-19 pandemic, the OPEC+ production cuts, and the geopolitical tensions. The midstream industry has also to adapt to the changes and the trends of the U.S. oil production and exports, such as the quality, the location, and the destination of the oil and its byproducts. The midstream industry has also to compete and collaborate with the other players in the oil value chain, such as the producers, the refiners, and the exporters of the oil and its byproducts.

In today’s blog, we will explore how the U.S. oil production and exports growth creates opportunities and challenges for the midstream companies, and how they seek an edge in the competitive and dynamic oil market. We will also discuss how the midstream companies affect the dynamics and the relationships of the various oil benchmarks, such as West Texas Intermediate (WTI), Brent, Western Canadian Select (WCS), and Magellan East Houston (MEH). These benchmarks are the reference prices for the different grades and locations of oil in the U.S. and the international markets, and they reflect the quality, the transportation cost, and the market conditions of the oil. The benchmarks are also used to price the oil contracts and transactions, and to hedge the oil price risk. The benchmarks are connected and interact with each other, depending on the availability and the accessibility of the oil supply, the demand and the preferences of the oil buyers, and the arbitrage and the competition of the oil markets.

Some of the key opportunities and challenges for the midstream companies are:

• The quality of the U.S. oil production and exports: Most of the incremental U.S. oil production is light-sweet crude from the Permian and other shale plays, which has a high API gravity and a low sulfur content. This type of oil is suitable for various refineries and end-users, especially in Europe and Asia, where the demand for light-sweet crude is high. However, this type of oil is not compatible with some U.S. refineries, especially in the Gulf Coast, which are designed to process heavy-sour crude from Canada, Mexico, and Saudi Arabia. This creates a mismatch between the U.S. oil production and consumption, and a need for the midstream companies to transport and export the surplus light-sweet crude to the global markets, and to import and transport the deficit heavy-sour crude to the U.S. refineries. The midstream companies also have to deal with the quality issues and the specifications of the different oil grades and locations, such as the iron content, the sediment and water content, and the sulfur content of the oil, which can affect the value and the performance of the oil and its byproducts.

• The location of the U.S. oil production and exports: Most of the U.S. oil production is concentrated in the inland regions, such as the Permian Basin, the Eagle Ford Shale, and the Bakken Shale, which are far away from the major refining and exporting centers, such as the Gulf Coast, the East Coast, and the West Coast. This creates a need for the midstream companies to build and operate pipelines, terminals, and vessels that can transport and store the oil from the producing regions to the consuming or exporting regions. The midstream companies also have to deal with the transportation and storage costs and constraints of the different oil grades and locations, such as the pipeline tariffs, the pipeline capacity, the pipeline bottlenecks, and the pipeline regulations of the oil, which can affect the netback and the profitability of the oil and its byproducts.

• The destination of the U.S. oil production and exports: Most of the U.S. oil exports are destined to the international markets, such as China, India, South Korea, and the Netherlands, which have a high and growing demand for oil and its byproducts. This creates an opportunity for the midstream companies to access and serve the global markets, and to benefit from the favorable price differentials between the U.S. and the international oil benchmarks, such as WTI and Brent. However, this also creates a challenge for the midstream companies to cope with the fluctuations and the uncertainties of the global oil demand and supply, such as the COVID-19 pandemic, the OPEC+ production cuts, and the geopolitical tensions, which can affect the volumes and the prices of the oil and its byproducts.

The opportunities and challenges for the midstream companies also have implications for the oil benchmarks and prices, as they affect the specifications and the differentials of the oil grades and locations. For example, the midstream companies can affect the inclusion or the exclusion of some U.S. oil grades or terminals in the assessment of the Dated Brent price, which is the most widely used and recognized oil benchmark in the world, and which recently added WTI Midland as one of its components. The Dated Brent price is based on the quality and the availability of the oil grades or terminals that meet the criteria of the price reporting agencies, such as Platts or Argus. The midstream companies can affect the quality and the availability of the oil grades or terminals, and thus their eligibility for the Dated Brent price assessment, by transporting, storing, blending, or exporting the oil grades or terminals. This can affect the competitiveness and the attractiveness of the U.S. oil in the global markets, as well as the arbitrage and the export potential of the U.S. oil producers and shippers.

“Things Have Changed” is a report that provides a comprehensive and detailed analysis of the U.S. oil production and exports growth and how it creates opportunities and challenges for the midstream companies. The report covers the history, the current status, and the future outlook of the U.S. oil production and exports, and how they affect the markets, the infrastructure, and the benchmarks of the oil and its byproducts. The report also provides data, charts, and maps that illustrate the trends and the insights of the U.S. oil production and exports. The report is part of RBN Energy’s 2023 Drill Down report series, a suite of reports covering many of the key issues expected to impact the markets for crude oil, natural gas and natural gas liquids.