As U.S. crude oil production surged over the past decade, West Texas Intermediate prices became deeply depressed relative to international benchmarks. A change in the law fixed that and turned the U.S. into a major crude oil exporter.

Oil markets are global, and therefore oil prices around the world generally move in tandem. There are differences in oil prices based on quality and geography, but the fungible nature of oil usually prevents specific benchmarks from getting too far out of line with other benchmarks.

In the U.S., we are most familiar with the West Texas Intermediate (WTI) benchmark and the internationally traded Brent crude. WTI is of slighter higher quality than Brent, and prior to about 2006 WTI almost always traded at a $1-$2/barrel premium over Brent.

In 2007, that WTI premium became a WTI discount, which grew to more than $10/barrel from 2010 through 2013.

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WTI and Brent Prices 1987 to 2017

What happened during those years? The U.S. government had a crude oil export ban in place, so the shale oil boom meant that the U.S. was suddenly and unexpectedly awash in crude oil.

U.S. refiners could refine that oil and export finished products — which they did. But domestic refiners had invested billions to process imported crudes that were becoming heavier and sourer. Because of the capital expenditures that had been made to process this oil, the economics favored heavy, sour crudes over the light, sweet crude oil from the shale oil plays.

Thus, even though crude oil is globally traded, because of the crude oil export ban, WTI was really a more localized market (similar to U.S. natural gas). Refiners had an abundant crude supply, which for them wasn’t the ideal quality. There were also logistical constraints in getting some of the new production to refiners. So, the WTI discount developed.

In December 2015, President Obama signed a $1.15 trillion spending bill that gave renewable energy producers a number of concessions in exchange for repealing the crude oil export ban. Refiners lobbied hard to preserve the export ban, while crude producers lobbied to get it repealed.

It didn’t take long for the repeal to have an impact. Through 2015, crude oil exports to Canada — which was exempt from the ban — had been growing. There were also a small number of exports to other countries, which was allowed on a case-by-case basis.

After 2015, the list of destinations for U.S. crude oil exports exploded. In 2015, Canada was the destination for 92% of U.S. exports. By 2018, Canada’s share had fallen to 20%. At the same time, the amount of exported crude soared from under half a million barrels per day to more than two million barrels per day.

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US Crude Oil Exports 2000 to 2018

The number of countries importing U.S. crude oil expanded to nearly three dozen. China briefly surpassed Canada as the top destination for U.S. crude oil exports. Last summer China imported more than half a million barrels per day of U.S. crude oil before trade war concerns prompted them to cut off their U.S. oil imports.

But the overall impact of increased U.S. WTI exports was to shrink the discount to Brent that had developed. After 2013, the discount declined for four straight years. By 2016 the discount had almost entirely vanished, which meant that WTI was again trading in line with the international benchmarks.

I believe the evolution of the WTI market can guide our expectations of the growing U.S. liquefied natural gas (LNG) export market. I will cover this topic in the next article.