European refiners traditionally buy from Russia (Urals, medium grade) and lighter crudes from the North Sea (Brent) and West Africa (Nigerian Bonny among others). Asian refiners are set up to process a heavier crude slate, and have longstanding relationships with the big Middle East producers.
We expect Europe to be the natural target for US light crude exports, displacing West African sellers who will, in turn, target Asia and compete with lighter Middle East grades. But it won’t be black or white – it’s a very liquid and dynamic market.
Crude cargoes can go anywhere, and as new kid on the block, US tight oil has no dependent relationships or loyalties. Asia’s where the growth is, and tight oil cargoes will find their way there from day one.
Third, rising tight oil volumes will have a lasting effect on crude price differentials.
Brent-WTI has averaged under US$3/bbl over the last three years; we expect it to be around US$6/bbl in the coming years. The WTI price is set inland at Cushing, Oklahoma.
The differential to Brent is made up of inland distribution costs and inter-pipeline competition to the Gulf Coast (US$4-5/bbl) and shipping whether to Europe or Asia (US$1 – 2/bbl). On the high seas, delivered WTI will price much the same as Brent; it’s the netback to upstream producers that could be US$6/bbl lower.