The issue of crude oil exports is getting closer, according to Ed Morse

A year ago at the Platts North American Crude Oil Marketing conference, much of the talk was about how growing supplies of US-produced crude oil were disrupting markets in the lower 48.

At the event this year, the scope of the discussion got a little bigger. It was more about the whole world.

Citi’s Ed Morse, a long-time observer and analyst of the oil industry, said the growing surge of US production is going to hit Washington with a quandary soon: what is the US going to do about growing imbalances that can probably only be fixed by exporting crude oil, specifically the light sweet kind that comes out of the Bakken and Eagle Ford deposits?

“Washington needs to come to grips with what to do with this surplus,” Morse said. “The current restrictions will be the focus of a major debate.”

And then the highly knowledgeable Morse went through the restrictions, while conceding that they are “murky.” You can’t export oil produced on federal lands, but you can export oil from the Strategic Petroleum Reserve. You have been able to export Alaskan oil since the 90′s, but what he didn’t note is that the few companies that tried that about 15 years ago found the economics didn’t work. And so on.

Morse also noted the possibility that Canadian heavy oil that comes down an approved Keystone XL pipeline might be exported, which is precisely what opponents of an Obama administration approval of the line have been saying as a reason not to OK the project. He said the same thing last year, but the growing supplies and the furor over Keystone XL makes that prospect an even more significant factor in the debate over the pipeline.

“Canadian crudes wil be exported from the US Gulf Coast before the end of 2014,” Morse declared. He painted a picture of a Canada-South Korea free trade deal that might encourage Canadian crude to move down to the Gulf, be shipped through a widened Panama Canal and head off to Korean refiners. Eventually, Morse said, Canadian Syncrude will be the “choice crude” into the Asia Pacific region, displacing such potential benchmarks as Russia’s ESPO.

By the end of this year, Morse projected that Canadian refiners–exporting crude oil to Canada is legal–could be taking in as much as 200,000 b/d of crude at refineries in the Atlantic Maritimes. That, in turn, could push some of that eastern Canadian crude into the Brent/West African market.

And on it went, all day: what’s the US going to do with all this crude? What infrastructure will be built to handle it? And what’s been the impact so far?

The impacts are increasingly projected to be far and wide. No West African imports into the US Gulf. Nigerian crudes floating unsold but giving a supply and liquidity boost to a tight North Sea market. China soon to become the world’s biggest importer of oil. A US Strategic Petroleum Reserve that’s getting out of whack with protecting a dwindling US import slate, and is rich in the light sweet crudes that are increasingly going to be in surplus.

Here are a few observations on those questions and scenarios (quotes only where it’s a direct statement):

Francisco Blanch, head of global commodites and derivatives research at Bank of America Merrill Lynch: The LLS-Brent spread, which has moved mostly in lockstep, should widen to about $2 in favor of Brent as the light sweet crudes of the Bakken and Eagle Ford make their way to the Gulf Coast region. The projects underway are going to alleviate the Cushing bottleneck, “but to go where, and what are we going to do with it?”

If it had not been for the shale revolution in the US, non-OPEC supply growth last year would have been negative, and Brent prices might have been up near the $130/b level, likely leading to a recession. If that happened, “we would probably have a different President today.”

Olivier Jacob, managing director of Petromatrix: WTI is a free market, with efficient allocation of resources. If price differentials exist, infrastructure will be developed to deal with it. By contrast, Brent is “the OPEC market.” ”Ultimately, its supply is controlled by OPEC.” Prices are now being set by OPEC actions in order to keep a “political” floor near $100/b Brent rather than a price that maximizes demand and supports economic activity.

The US already effectively exports crude by exporting a growing level of petroleum products. And it exports natural gas by exporting an increasing amount of coal backed out by growing supplies of cheap natural gas.

Paul Miller, senior vice president, oil pipelines, TransCanada Corp.: Converting TransCanada’s main west-east natural gas pipeline to crude is “economically feasible and technologically feasible.” It can provide Alberta producers with a positive netback to ship their crude east. “So now we’re talking to the marketplace to see if this is something they want us to do.”

Jan Stuart, managing director and head of global energy research, Credit Suisse: By the end of this year, LLS should be $2-$4 less than Brent, and we see the LLS-WTI spread at $8-$12 by the end of the year.