Export Battle Brewing

Jim Brown
 
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Back in the 1970s around the time of time of the Arab oil embargo Congress passed a law banning oil exports from the U.S. without a specific permit. That law is about to be challenged by domestic producers.

With the spread between WTI and Brent widening again, currently $13.45, U.S. producers are complaining about the lost revenue by being forced to sell their oil at WTI prices. Actually many are selling their oil well under WTI prices with shale oil areas like the Bakken sometimes seeing a discount $10 less than WTI because of the transportation problems.

Brent is the price for waterborne light crude. Almost all the other grades produced around the world for export are quoted at a discount or premium to Brent. If WTI was available for export it would sell at Brent prices as a waterborne product. Waterborne means it can be shipped anywhere in the world and that makes it a liquid commodity that is not restricted by demand or prices in a specific region.

The American Petroleum Industry (API) trade group is developing the "necessary legal analysis" to support a move to gain export approvals. Currently exports are only available by a specific permit. For instance if 1,000 barrels of oil are produced in Western Canada but they are needed in central Canada the various parties can petition for an export license for 1,000 barrels to central Canada. The 1,000 produced in Canada are exported to the U.S. and a different 1,000 barrels are exported back to Canada 1,500 miles away. That specific permit is limited to that exchange.

If WTI was approved for export very little would actually be exported. Just having the capability would raise the WTI price and accomplish the goal. It would be silly to export WTI out of the country when we are currently importing around 10 million barrels per day in crude oil and refined products. In late 2012 we were still exporting about 2.5 mbpd of refined products. Producers just want the capability so that prices will adjust closer to Brent.

There is another consideration. We have imported oil for so long the majority of our coastal refineries are setup to process heavy sour crude like we get from the Middle East and Venezuela. There is actually a limit to how much light sweet crude we can refine economically. The heavier crudes are better for producing diesel, heating oil, fuel oil, etc. Light sweet crude is better for gasoline because it has fewer emissions, less byproducts and it is easier to refine.

Some analysts believe it is around 8-10 million barrels per day. We currently produce about 7.9 mbpd of oil in the USA. Most of it is light sweet crude. Over the next two years the production from the shale fields and the Gulf of Mexico is expected to increase our production by another 2.0 mbpd to roughly 10.0 mbpd. Saudi Arabia is currently producing about 9.5 mbpd with claimed capacity of 12.5 mbpd. Russia is currently producing just under 10.0 mbpd and declining. The various energy advisory firms IEA, EIA, IMF, OPEC, etc predict the U.S. will become the world's largest producer again somewhere in the range of 2015-2020 depending on who you believe.

However, if you look back in the OilSlick archives I have written several articles on the peaking of shale oil in the Bakken and the Eagle Ford. Both of those highly prolific areas are expected to peak between 2015-2017 as all the available drilling sites are completed. Those areas are limited by geography and there are only so many drilling sites available in the productive zones.

I seriously doubt the U.S. will approve oil for general export for national security reasons. We should not sell our oil overseas but continue to keep it within our borders and for our own use. The more we export the faster we will run out and then be at the mercy of OPEC once again. With the majority of OPEC nations falling out of friendship with the U.S. over the last several years we don't need to be dependent on them in the near future.

I understand the complaints of domestic producers but "the needs of the many outweigh the needs of the few." (Spock, Star Trek, The Wrath of Khan, 1982)

Market

Thank you Janet Yellen! She is not even chairman yet and she is already spiking the markets. The text of her testimony to the Senate confirmation committee was released today ahead of the actual hearing on Thursday morning.

She defended the Fed's current QE program and called it the best way to get the economy back to normal. She said, "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy." She claimed the U.S. has come a long way since the dark days of the recession but that important work lies ahead. "For these reasons, the Fed is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases."

The keyword was ultimately. Her comments were see as very dovish and suggested there will not be any rush to cut QE purchases. She will officially take office at the end of January but the December and January meetings will have her fingerprints all over them. Bernanke is not likely to shove a QE taper through the committee if Yellen is opposed. She is seen as super dovish and more so than Bernanke.

The markets rallied on the release of the text and the Dow and S&P broke out to new highs while the Nasdaq closed at a 13 year high. Futures are positive overnight and suggest we could move higher.

Jim Brown

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