U.S. oil and natural gas is helping Europe stave off supply shortages as more Russian sanctions take effect this month.
American energy exports of liquified natural gas and crude oil will continue playing a key role in stabilizing Europe by filling the “energy gap” left by Russian imports. While U.S. energy exports will help Europe power through winter in the short term, recent data shows that U.S. exports to Europe increased substantially in 2022, and are expected to remain high through 2023 as new sanctions take effect and Europe secures supplies for the summer.
U.S. Crude Oil Could Prevent Potential Disruptions
The United States increased its oil shipments to Europe 70 percent in 2022 alone, and exports are projected to stay high following the European Union’s implementation of a ban on Russian diesel and other oil products last weekend.
Source: CME Energy Group
However, Eurasia Group analysts warn that the EU’s ban “will probably have a more disruptive effect than previous EU crude-import sanctions,” raising concerns about supply disruptions. Without alternative supplies, the sanctions would heap new costs on diesel reliant industries including farm machinery, manufacturing, and construction. Currently, U.S. crude accounts for around 12 percent of EU refinery processing volumes.
Fortunately, beginning in June 2023, U.S. West Texas Intermediate (WTI), the light, sweet grade of crude oil sourced from Texas, will become a deliverable fuel in Brent forward markets. This would be the first inclusion of a non-North Sea grade crude oil included in the Brent oil benchmark, one of oil’s most important price benchmarks. The inclusion of American crude is expected to boost the liquidity of the Brent benchmark and has generated greater interest in the U.S. crude oil market. As CME Group explains:
“Trading in the WTI-linked derivatives has been increasing in recent months ahead of the change to include WTI Midland. Contracts have been traded as far ahead as December 2026 for WTI Houston and December 2025 for the WTI Midland. The total level of open interest across the Midland and Houston contracts, a good measure of the success of a contract, reached 300,000 contracts at the end of December 2022, an increase of 60,000 lots over the past 12 months.” (emphasis added)
This is thanks in large part to Texas crude’s role as a feedstock for European refineries.
U.S. LNG will fuel Europe Long-Term
U.S. LNG exports increased more than 130 percent in 2022, according to data from Kpler. The increase supply accounted for more than half of Europe’s LNG imports as Russian imports dropped 54 percent. Last month, U.S. exporters sent 6.84 million tons of LNG abroad with Europe receiving 68 percent of total cargoes.
Source: Reuters
U.S. LNG is projected to remain Europe’s largest energy partner through 2023 as importers sign long-term contracts to secure cargoes for the near and distant future. Since November, U.S. LNG exporters have signed five long-term supply and purchase agreements with European buyers. According to NGI, sponsors signed long-term agreements to supply nearly 50 million metric tons of natural gas per year:
“European buyers including Engie SA, Galp Energia SGPS SA, Ineos Group Ltd. and RWE AG have signed deals to buy U.S. liquefied natural gas for 15 years-plus. During the same time, Trafigura Group Pte. Ltd secured a $3 billion loan backed by the German government to buy more gas for the country. ConocoPhillips also signed contracts with QatarEnergy to move more of the super-chilled fuel to Germany.”
Fred Hutchison, President and CEO of the U.S. LNG Association, told the Washington Examiner that the new agreements illustrate a recognition of the value of American LNG for providing Europe with energy security and unlocking important financing to expand new gas liquefaction and export terminals in the United States.
The new contracts support LNG projects in the Gulf of Mexico currently under development and match with the rise of investments into new natural gas infrastructure in Europe following commitments by European governments to diversify energy resources. While these projects won’t be online in the near future, the 15+ year supply deals are a clear indicator of interest in American LNG into the far future.
Bottomline: America’s record oil and gas production is securing Europe’s immediate energy future and supporting their resolve to eliminate Russian energy imports. U.S. energy exports are set to increase through 2023 to fulfill an immediate and distant need as WTI crude becomes a deliverable into European forward markets and pricing mechanisms, and European countries secure long-term LNG supply deals.
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