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Delta blues

29 January 2014 By Christopher Swann

Forget West Texas Intermediate. Louisiana Light Sweet crude is the new spread bet. With U.S. output surging, WTI oil costs less than the global Brent crude benchmark by about $11 a barrel at present. The Louisiana product, though, still trades nearer the world price. With no sign of American production growth slowing, that discount will soon widen.

Brent, WTI and LLS are chemically similar oils that yield large volumes of gasoline compared to heavier crudes from places like Venezuela. What separates them is where they are produced and sold. WTI crude, for instance, has mostly been trapped in America’s interior as the pipeline network has failed to keep pace with a spurt in output from shale areas like North Dakota. In October 2011, the glut sent the WTI price plunging a record $27 per barrel below Brent.

Until recently, Louisiana crude seemed in little danger of attracting a similar discount. It is produced near its main consumers on the Gulf coast, home to 40 percent of U.S. oil refining capacity. LLS goes head to head with Brent crude imported through nearby terminals. It was trading just $5 a barrel below Brent’s $107 price on Wednesday, and for much of 2013 the Louisiana product was actually pricier.

America will, however, soon produce more light sweet crude than its refiners can use, with maximum capacity estimated at about 9 million barrels a day by Citigroup. Imports of light crude fell by 50 percent in 2012 to less than 1 million barrels a day, reckons investment bank Tudor, Pickering, Holt. By the end of 2014 U.S. refiners may not need to import any of the oil. What’s more, transport improvements are making it easier to move WTI product to the Gulf coast.

That could leave the United States with a serious surplus of Louisiana Light Sweet for the first time. Exporting it should be the answer, but American laws currently restrict such sales to tiny amounts. Unless that changes, market forces will turn Louisiana oil into the next cut-price WTI.

 

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