The issue, as we noted yesterday, is that the large independent U.S. refiners are now price-makers, not simply price-takers. Saudi Arabian exports of medium crude are fetching prices about $20 a barrel lower than prices for the same crude headed to Asia. Including Iraq, Kuwait, and Venezuela, the four OPEC members are leaving about $50 million a day on the table on shipments to the U.S. according to a report in the Financial Times.
The FT cites Saudi Arabian oil minister:
That’s the market. You know why [the discounts exist]. There’s too much crude in the US: good for the US.
As well as putting pressure on U.S. producers, Gulf Coast refiners like Valero Energy Corp. (NYSE: VLO), Phillips 66 (NYSE: PSX), and Marathon Petroleum Corp. (NYSE: MPC) are now putting downward pressure on other exporters. Of course OPEC could just cut its exports to the U.S. and send the crude to Asia which would inevitably close the spread. The question for OPEC suppliers is whether they want to maintain a reasonable share of the U.S. market even at a discounted price.
So far OPEC has answered that question in the affirmative and it is more probable than not that they will continue to hold on to their share of the U.S. market even at discounted prices. After all, China or Japan or India may drive a harder bargain if OPEC tries to divert oil to Asia to fetch a higher price. And by continuing to ship crude to the U.S., OPEC helps keep U.S. prices low and can hope that as the price falls, shale plays will be unable to make a profit.
The problem with that last bit is that shale producers can make a profit even if crude prices fall below $80 a barrel. At those prices, OPEC will almost certainly have to rethink its position.
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