London (Platts)--20Feb2013/533 am EST/1033 GMT

The technological revolution that has seen US crude production climb to 20-year highs has ensured the NYMEX crude contract's position as the global oil benchmark and opened the door for the US to become a key exporter of refined products, according to a senior official with NYMEX parent CME Group.

"Realistically, if you think about the global oil scene, where are things happening? They're happening in the States, they're happening in the increased production that the US is getting out of the ground with all the fracking technology and things of that nature," CME Group Global Energy Products and Services managing director Gary Morsches said in a Tuesday interview.

According to the most recent Energy Information Administration weekly inventory report, the US is currently producing in excess of 7 million b/d, with the US Department of Energy agency also forecasting production to average 7.25 million b/d this year and to climb above Saudi Arabian output by 2020.

"The key is the production is getting access to markets, that's the big infrastructure, the rail and the pipelines," Morsches said, adding logistical constraints that had held crude stocks at Cushing, Oklahoma, the delivery point for the NYMEX contract, were starting to ease.

"You have seen the Seaway pipeline up to 400,000 b/d, the second leg of Keystone is going to be up by the end of this year and that's going to add close to another 700,000-800,000 b/d, we've had massive rail infrastructure and investment that is getting crude down to the Gulf Coast, but also over to the East Coast as well," Morsches said.

This, he added, would open up new markets for the crude, reducing US imports -- currently "less than half of what they were a couple of years ago" and expected fall to zero over the course of this year, he said -- that could now be sent elsewhere.

"I think that bodes well for WTI, that bodes well for the state of the US crude production/consumption fundamentals and I think that increases the relevance of WTI," Morsches said of the NYMEX crude contract.

"What this change of flows is doing is backing out all that light sweet crude that is coming in here... and with the depth of liquidity, the transparency around WTI as a benchmark contract is increasing its relevance both in the US and worldwide."

US FUTURE AS OIL PRODUCT SUPPLIER

Another feature of this increased production, Morsches added, was the prospect of the US, which has legislative restrictions on crude exports, becoming a key player in the global refined products market.

"I think what you are going to see and what you are seeing right now is increased refinery runs and you'll see the US export more refined products and maintain that route, not exporting crude, but exporting the finished goods, which is a good thing," Morsches said.

"You have seen the demise of the European refiners, the lack of complexity that have and the economics of these older refiners aren't keeping up, so consequently it is the US and the new refineries in the Middle East that are going to make up the bulk of the product balances."

In this regard Morsches noted US refiners had been changing their investment strategies toward capitalizing on the increased light sweet crudes available, altering their crude buying and boosting their crude runs.

In the meantime, Morsches said, the change in worldwide crude flows was also expected to ease the supply problems from out of the North Sea and help narrow the ICE Brent premium to WTI, which has spent the bulk of the last 12 months at more than $20/b, back to more normal levels approaching parity.

"We have had decreases in production, we've seen all the problems plaguing [North Sea output] with overhauls and things of that nature on production, we just have fewer barrels available in Brent and with the tax advantages they're taking and exporting a lot of this over to [South] Korea into markets that they never exported into before, so consequently what you've got now is really a 'North Sea syndrome,'" Morsches said.

"You've got supply fundamental issues around the North Sea that have taken that crude and jacked its price way high and that's a structural issue that's not going to be resolved with building a pipeline or short-term infrastructure investment, that's a real fundamental problem that's plaguing the Brent crude contract, the lack of product."

Instead, Morsches said, it would be the knock-on effect of the rising US production that would drag the premium back down.

"It is inevitable, it's going to take patience... the fundamentals will work themselves out, because the crude flows change and continue to change over time," Morsches said.

"The fact that the US is backing out all those light sweet imports altogether, you'll have a domino effect... around the globe and those Nigerian crudes [currently being exported to the US] are going to displace some Brent cargoes and things of that nature and kind of rejig or rebalance those fundamentals."

--Geoff King, geoff_king@platts.com
--Edited by Lisa Miller, lisa_miller@platts.com

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