oilprice.com
"Crude is rallying on this final day of January, as hopes and projections of OPEC production cuts return to the fore once more. Before we charge into a new month tomorrow, amid weekly inventory data to boot, hark, here are five things to consider in oil markets today.
1) The implications of a Border Adjustment Tax (BAT) - aka an import tax - on U.S. crude would not only impact import flows, but exports and domestic production as well.
If crude was homogenous, then there could be direct substitution: U.S. domestic production, suddenly at a 20 percent advantage given an import tax, could replace crude imports. But it is not quite that simple; crude comes in many different grades (we tracking nearly 400 of 'em). There are three main grades: light, medium and heavy. This is where the challenge arises.
U.S. shale plays produce higher quality, light crude. This is juxtapositioned with the U.S. Gulf coast, the refinery hub where nearly half of U.S. refinery capacity is. It has some of the most sophisticated refineries in the world, which are configured towards refining lower quality, heavier crude. They are not configured to refine light crude.
2) In addition to Canadian land-based flows of over 3 million barrels per day, the U.S. imports nearly 1.7mn bpd of waterborne heavy crude, the vast majority of which (1.45mn bpd) goes to U.S. Gulf refiners. The remaining volume finds its way to East and West coast refiners. There are two leading suppliers of this heavy crude, Mexico and Venezuela, who account for three-quarters of these flows.
Given that U.S. domestic light crude cannot replace these heavy imports, they will continue to be imported by U.S. Gulf Coast refiners, just at a 20 percent higher price. The refiners will then pass on this cost to the consumer in the form of higher refined product prices - aka…higher prices at the pump."
