By Devika Krishna Kumar and Collin Eaton
NEW YORK/HOUSTON, Aug 20 (Reuters) - Two long-awaitedpipelines out of the busiest U.S. shale patch started shippingoil to Gulf Coast export hubs last week - just as U.S. crudebarrels suddenly do not look all that attractive to buyersaround the world.
The two lines, which run from Texas' Permian region to theU.S. Gulf Coast, alleviate bottlenecks that prevented oil fromgetting to the coast amid a surge in U.S. exports. Still, due toa series of factors in global oil markets, the increased accessto the Gulf is making U.S. exports less competitive - if onlytemporarily.
U.S. crude oil exports have surged to more than 3 millionbarrels per day (bpd) since a 40-year ban on the practice waslifted in 2015. But global buyers still use the U.S. crudebenchmark, delivered to and priced at Cushing, Oklahoma, nearly500 miles (800 km) from the coast - as an arbiter of whether itis attractive to buy U.S. barrels. Right now, it isn't.
The primary motivator for buying U.S. barrels is thediscount on Cushing-based West Texas Intermediate (WTI) to theinternational Brent benchmark <WTCLc1-LCOc1>. That spread wasmore than $11 in late May, making for a wide arbitrage thatshippers took advantage of by purchasing barrels in Texas andselling them into Europe or Asia.
That spread has since collapsed to just under $4 a barrel,and the new pipelines are part of the reason. Because Permianoil producers are now sending those barrels to the Gulf, thereduced flow to Oklahoma is boosting the price of Cushingfutures. In addition, Midwest refineries have been runningnearly at full capacity, and they source barrels primarily fromCushing.
Adding supply to the Gulf Coast has made prices therecheaper - by some measures. The premium on oil delivered at EastHouston, called MEH, in comparison with U.S. futures deliveredto Cushing <WTC-MEH> has declined, but the overall narrowing inthe WTI-to-Brent spread has canceled out that move.
The spread between MEH and international benchmark Brent hascontracted to near its tightest since May as Brent has alsoweakened due to recent muted buying in European markets.
"Export arbs, like MEH-Brent, have compressed to levels thatdiscourage exports. We think export arbs will likely need towiden out going forward in order to help clear rising suppliesof U.S. tight oil," Bank of America Merrill Lynch (BAML)analysts said in a note.
Pipeline operators Plains All American Pipeline andEPIC Midstream Holdings have begun commercial deliveries onlines that can carry over 1 million bpd of oil to the Gulf Coastfrom West Texas.
The new pipelines have also pushed the price for West TexasIntermediate (WTI) at Midland <WTC-WTM> - the heart of the shaleregion - to its highest level since February, making it lessprofitable to ship to Cushing.
As a flood of oil arrives at the coast instead of at Cushingin coming months, it may further narrow the spread between U.S.and Brent futures, dealers said. That would hurt exports aswell. U.S. crude exports in the week ended Aug. 2 fell to a10-month low of 1.87 million bpd, according to government data,before rebounding a week later.
SAGGING GLOBAL DEMAND
U.S. exports may also be sliding due to the effects of theU.S.-China trade war and economic weakness worldwide. U.S. crudeexports to China through May averaged 108,000 bpd, compared with350,000 bpd for the same period last year, according to U.S.government data.
In Europe, meanwhile, there are already plenty of light,sweet crude barrels competing for the same customers. Last week,there were at least 25 cargoes of Nigerian grades available inthe Atlantic Basin, traders said.
"The (U.S.) Gulf to Europe and Brent prices are deterringU.S. barrels from moving across the Atlantic," said MichaelTran, director of energy strategy at RBC Capital Markets in NewYork.
"We anticipate that U.S. crude exports will remain depressedover the balance of summer," he said in a note.(Reporting by Devika Krishna Kumar in New York and Collin Eatonin Houston; Editing by Dan Grebler)