Who Are You Kidding?

Jim Brown
 
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Daniel Yergin, longtime foe of the Peak Oil crowd, made news on Friday claiming removing the oil export ban would reduce gasoline prices by 8 cents in the USA.

Yergin claims ending the ban on exports would allow the U.S. to sell its highly rates light sweet crude on the open market and that would drive down the price of heavy sour crude we buy from other countries.

The first point that should make his report suspect is that it was paid for by Exxon, Chevron and Halliburton. Any report that big oil funds has got to be suspect. They would not be paying for a report that said ending exports would reduce oil prices. They have a vested interest in seeing oil prices move continually higher.

Secondly, the U.S. imports roughly 7 million barrels of crude per day from places like Venezuela, Brazil, Angola, etc. Why should we continue to fund the government of Venezuela by importing one million barrels every day from that country? Maduro hates us and blames the squalid conditions in Venezuela on the USA. The U.S. House just voted last week to place sanctions on Venezuela because of his treatment of his citizens yet we send them $3 billion per month for their imported oil.

Yergin claims U.S. refineries can't refine the light sweet crude produced by our shale fields. That is not entirely true. Many refiners are setup to refine the heavy sour crude that we import because they could not get light crude at a decent price in the past. Back in 2008 when oil prices shot up to nearly $150 there was a significant shortage of light crude that drove the prices up. Refiners spent billions upgrading their refineries to process the cheaper heavy crude they could import from overseas in any quantity. Saudi Arabia has millions of barrels of excess heavy crude production they can turn on almost immediately if there was a demand for it.

The biggest demand around the world is for light sweet crude. It is easier to refine, produces less toxic byproducts and for the last couple of years it has been cheaper for U.S. refiners because of our increasing shale production.

Yergin claims gasoline prices will go down 8 cents between 2016 and 2030 as a result of allowing exports. I believe if we allow exports of our currently "cheap" crude the price of gasoline will go up. I am positive the oil companies all want to export because they believe the price of oil will go higher not because they expect it to go lower.

He also says it is stupid for the U.S. to allow gasoline and diesel exports but not allow oil exports. Personally I think it makes all the sense in the world. When we refine our own crude and export it as refined products we produce jobs for thousands of workers and our export dollars are higher because we are exporting finished products instead of raw crude.

By keeping our refineries running a 90% capacity as they are today we are preserving a national security asset. The ability to produce large quantities of fuels is a national security plus. If we allowed our refineries to decline because we were exporting the raw material then in times of national stress and high demand we would have to import fuel from overseas. This would make us vulnerable to terrorism, wars, embargos, etc just like we have seen in the past. We need to keep all our refineries operating and producing not just products but good paying jobs for thousands of U.S. workers.

Yergin also states that the cheap WTI oil in the U.S. discourages investment by refiners to upgrade their plants to process the light crude. That is just plain stupid. If refiners are currently paying $110 for waterborne crude based on Brent pricing and WTI inside the U.S. is selling for $85-$95 depending on which field it comes from, then why would it not be worthwhile to upgrade the refineries to process oil that costs $15-$25 less. The gasoline they sell today is the same price regardless of whether it came from Brent crude or WTI crude. This is why refiners with the WTI capability are making so much money over their competitors. Who would not want to use a cheaper and cleaner grade of oil? Do the math!

Lastly, it has been forecast multiple times in studies funded my multiple groups that U.S. oil production is going to peak by 2017. The decline rates in shale fields are too sharp to continue increasing production forever. I have written about this numerous times in these pages.

The EIA is forecasting this in their recent update as the median scenario. If oil prices were to fall thanks to ending the export ban, which is an extremely ridiculous assertion, then production would fall. I published a chart last week showing the cost to produce from shale fields in North America was $65. If the price for WTI were to decline as Yergin suggests then capital expenditures for drilling and exploration would decline. Oil companies need a constantly rising price for oil in order to pay for the increasingly costly technology that is used to produce shale oil.

Anytime all the major oil companies get behind a project like ending the export ban you can bet it is NOT because oil or gasoline will be cheaper in the future. They need higher prices to pay higher exploration costs. Surely I am not the only person that understands this fact.

The EIA reported that a tanker of one million barrels of oil was exported from the U.S. to Spain in early May. The oil was one half Canadian crude shipped by rail to the Gulf and one half Mexican Maya crude imported by pipeline from Mexico. There is no restriction on the re-export of imported foreign oil. Obviously the exporters were able to get a higher price on the waterborne market than they could have gotten in the USA. It only makes sense that if U.S. crude was available for export the price of WTI would rise to be equal to the higher priced Brent crude. The U.S. consumer would pay higher gasoline prices thanks to a higher market price for WTI.

Oil Inventories

Crude oil inventories rose +1.7 million barrels last week to 393.0 million. Imports rose from 6.47 mbpd to 7.81 mbpd adding a whopping total of 9.38 million additional barrels to inventory over the prior week.

I would note that imports declined -4.62 million barrels the prior week and oil inventories fell -7.2 million barrels. I believe what we have here is a failure to calculate correctly on the week to week numbers. There was an abnormal dip the prior week and abnormal rise last week. This could have been related to a fog problem in the Houston shipping channel, storms in route that slowed tankers, etc. The numbers always even out in the long run so we should not be too concerned about the week to week fluctuations.

U.S. production hit another post 1988 high at 8.47 mbpd thanks to the warmer weather that provided a boost to well completions. This compares to 7.3 mbpd in the same week in 2013.

Gasoline inventories declined -1.8 million barrels and probably a result of inventories being drawn down by the Memorial Day driving. Gasoline demand rose to a multi-month high of 9.31 mbpd. Driving season has arrived.

Distillate inventories, jet fuel, diesel, etc, were nearly unchanged with only a -200,000 barrel drop.

Refinery output rose to 19.56 mbpd and a multi-month high. Refinery inputs totaled 15.85 mbpd, up +4.4% from 2013 and close the high for the year. Outputs are always higher because breaking down heavy crude into its lighter components produces an increase in volume.

Exports of refined products rose +9.4% from the same week in 2013 to about 3.0 mbpd on average.

Refinery utilization rose from 88.7% to 89.9%.

In the graphic below green represents a recent high and yellow a recent low.





U.S. natural gas in storage rose by +114 Bcf last week. That was the highest injection so far this year but we are nearing the air conditioning season where electrical usage will soar along with gas consumption. With roughly 22 weeks until the end of the injection season we are going to need to increase those injections or we are going to have a gas shortage next winter.

Reportedly there are several thousand wells in the Marcellus that have been completed but not yet connected to a pipeline because the infrastructure is still being built. We should see the impact of this in the months to come and hopefully it will provide an injection boost.

At this point the normal spring decline in natural gas prices is not likely to happen. Everyone can see the looming shortage and prices are likely to rise this summer.

It makes you wonder what gas will cost once the Cheniere LNG facilities are up and running and sucking close to 6 Bcf a day or -8% out of the system.

Market

The stealth rally is likely to continue next week and any minor dips will be bought. As long as the economic reports and the ADP and Nonfarm employment reports are at least neutral the rally could continue. The ECB rate decision on Thursday could be a hurdle if they fail to announce any significant stimulus as promised.

In midterm election years June is the worst month for the Dow and S&P. Keep that in mind and don't over leverage your accounts.

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Jim Brown

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