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Welcome to Saudi America

WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.

But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.

If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy:

BNP Paribas’ Harry Tchilinguirian and Gareth Lewis-Davies note that these growth levels could point to a softer global supply and demand balance in 2013 — mostly at the expense of Opec crude:

That said, the analysts are still cautious. For one, Opec does have the capacity to cut production. Secondly, the US cannot export its crude oil and Canada has few alternative options for its heavy bitumen supply other than the US market. There are also potential issues with maintaining those production rates.

As the analysts observed this week:

We believe risks exist to the anticipated rise in output. This resides in the difficulty in correctly extrapolating not only the performance from an existing field to other provinces but also extrapolating accurately the well performance from the initial sweet spots to the less advantaged areas of a field. Despite efficient gains with further lateral reach in horizontal drilling or the use of stacked wells, we need to recognise that still high depletion rates will require an ever-increasing level of drilling activity just to keep production constant, let alone expand significantly. As such, projections of overall US shale oil supply growth are subject to potential downside risk.

And the other problem is the ongoing lack of transport infrastructure:

Despite the caveats above regarding US oil supply, it is transport infrastructure that will be pivotal in shaping the influence on oil prices of this source of non-OPEC supply growth. Despite the development of rail capacity, moving tight light oil to East Coast refiners (that favour a lighter barrel diet) is still subject to limitations, leaving some oil confined to a North/South corridor which is serviced by pipelines. The removal of pipeline constraints at Cushing (Table 2) does not necessarily spell the end of weakness in the prompt price of WTI. Risks remain: Cushing-related arrivals on the Gulf Coast from the Seaway pipeline will compete with arrivals from Texas via the Longhorn and other lines. If this contributes to backing out foreign crude from the Gulf Coast, it may not prevent saturation of the region by light oil. As such, the incentive to ship light oil south from Cushing may face hurdles that can only be resolved by a deeper discounting of cash WTI. Otherwise, a surplus of light oil in the Midwest is likely to persist.

The message being… North America may find it harder to benefit from the supply boom than you might expect. So it’s still conceivably good news for Tesla.

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