In the February Short-Term Energy Outlook (STEO), EIA projects that the discount of West Texas Intermediate (WTI) to North Sea Brent crude oil, which averaged $11 per barrel (bbl) in 2013, will average $11/bbl and continue at the same level in 2014 and 2015 (Figure 1). This discount reflects the economics of transporting and processing the growing production of light sweet crude oil in U.S. and Canadian refineries. EIA expects this forecast WTI discount to represent the Light Louisiana Sweet (LLS) discount to Brent minus a pipeline transport cost of approximately $4/bbl from Cushing, Oklahoma to the Gulf Coast.
The WTI–Brent spread previously represented the cost of moving crude oil on marginal modes of transportation such as railroad and truck from the bottleneck at the Cushing, Oklahoma, hub. However, with adequate pipeline capacity to move crude from Cushing and growing tight oil plays to the Gulf Coast, Gulf Coast refiners have completely backed out imports of light sweet crude. As a result, lower crude prices, previously limited to the Midcontinent, have moved to the Gulf Coast, and they are reflected in the discount of LLS to Brent, which developed in the second half of 2013.
Continuing strong production growth combined with recent infrastructure adjustments will result in more light sweet crude flowing to the Gulf Coast in 2014 and 2015. EIA estimates U.S. crude oil production grew by more than 1 million barrels per day (bbl/d) in 2013, and the majority of this growth was light sweet crude oil from the Bakken, Permian, and Eagle Ford tight oil formations. In the latest STEO, EIA projects that U.S. crude oil production will grow by an additional 1.0 million bbl/d in 2014 and 0.8 million bbl/d in 2015 to reach an average production of 9.2 million bbl/d. Much of this production growth will be in the Gulf Coast or connected to the Gulf Coast region by pipeline.
There are three main recipients for incremental crude production that arrives on the Gulf Coast:
• U.S. Gulf Coast refineries
• Canadian refineries via foreign–flagged vessel for holders of export permits
• U.S. East Coast refineries via U.S.–flagged vessels
While shipping additional crude to U.S. and Canadian East Coast refineries, which are better suited to run light sweet crude, will provide an outlet for some production growth, most additional production will be processed in Gulf Coast refineries. Minor capacity increases will help accommodate some of this production growth, notably Kinder Morgan's 100,000-bbl/d condensate splitter in Galena Park, Texas, 50,000 bbl/d of which is scheduled to start up this quarter and the rest in 2015. However, much of the increased production will replace imports of medium and heavy crude, lightening the crude slate of Gulf Coast refiners. The ability to reduce imports further, especially along the Gulf Coast, to offset the expected growth in U.S. supply over the next two years could be limited by refinery partnerships and long-term supply contracts.