Trader Talk

Americans should win if U.S. oil producers export

An oil refinery in Pascagoula, Miss.
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The Commerce Department's decision to allow Pioneer Natural Resources (PXD) and Enterprise Product Partners (EPD) to ship very light crude oil (condensate) to foreign buyers with minimal refining has produced an immediate set of winners and losers.

Winners: Eagle Ford area oil producers. This area in Texas produces the light crude (known as condensate) that has been permitted for export. For those producers, selling outside the U.S. market will also likely be more profitable. Notable Eagle Ford producers include Pioneer Natural Resources (PXD), Chesapeake Energy (CHK), EOG Resources (EOG), Anadarko Petroleum (APC), and Comstock Resources (CRK).

The odd thing is that it's likely not all of them produce condensates in large numbers, but they are all up indiscriminately.

Is this the first step on lifting the ban on crude oil exports in general? Not clear, but parts of the market are acting like it is.

Look at the huge drop in refiners, with Valero (VLO), HollyFrontier (HFC), Delek US Holdings (DK) and Marathon Petroleum (MPC) down six to eight percent.

Why? Exporting U.S. crude would likely bring down the price of Brent crude. Refined oil prices are generally set by Brent crude...that's the global market benchmark. So lower Brent prices mean lower profits for oil refiners.

Howard Weil estimates that if the export ban would be completely lifted, the price differential between West Texas Intermediate crude oil and Brent crude would drop from roughly $9 to roughly $6 (the spread has dropped significantly today). They estimate that would lower Valero's full-year EPS estimate from $6 to about $4.

The full ban has not been lifted yet; still, a one-third reduction in earnings is significant.

Lifting the ban should be good for American consumers and for U.S. producers. In theory, Brent prices should drop, and the differential between Brent and West Texas should drop.

And why is oil above $100? It's a supply concern issue. Libya is in civil war. Nigeria could implode at anytime. Iraq already has imploded, though it is still exporting. Venezuela and Mexican production is declining. The biggest fear is production in the Persian Gulf could be impaired.

Will this ruling be expanded to include other producers and other types of crude oil? It's not clear, but one thing's for sure: Other companies are going to be lining up to get export permits of their own.