Market Insider

Lifting oil export ban could be long-term game changer

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The end of the 40-year-old ban on crude oil exports should have little immediate impact on the U.S. oil industry, but longer term it's likely to help U.S. shale producers and give the United States more clout in a cut-throat, global energy arena.

The United States currently generates about 9.2 million barrels of oil a day, about half of which is shale production. But the U.S. also imported about 7 million barrels a day this year, so with the world awash in crude, there is not likely to be much demand for U.S. exports.

The U.S. is on the verge of ending the restriction, after congressional negotiators late Tuesday included removing the ban in a deal on a $1.15 trillion spending bill, along with such provisions as the extension of tax breaks on solar and wind energy. And while an end to the ban wouldn't have a massive immediate effect on oil markets, it could drastically alter some parts of the domestic and global energy industry in the longer term.

"It's definitely an improvement, but it's not like the be-all and end-all that's going to stop the bleeding in the oil patch," said Andrew Lipow, president of Lipow Oil Associates. "This is a small thing compared to Iran coming back to the market with a million barrels a day. … This reduces an artificial logistics impediment."

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While new oil exports likely would not amount to much immediately, they would provide another challenge to already fractured OPEC. The Organization of the Petroleum Exporting Countries has been allowing market forces to set prices for the past year, abandoning its previous policy of manipulating prices through the use of output quotas. That policy has cut into some U.S. production, but the world is still overproducing by more than 1 million barrels a day, and Iran could start reintroducing barrels to the market early in the new year.

"It's just more oil being introduced into a wildly oversupplied market," said John Kilduff, partner with Again Capital. "At times this could be problematic for OPEC and Russia because of the intense market share battle that's already underway. This could hurt them on the edges." The U.S. is the third-biggest oil producer after Russia and Saudi Arabia.

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OPEC secretary general Abdalla El-Badri said Wednesday that there would be no market impact from U.S. exports because the U.S. is an importing country.

However, exporting U.S. crude could alleviate some imbalances in the world oil market. For instance, the U.S. has already approved limited exports of U.S. light sweet crude to Mexico. Mexico uses the lighter grade in its refineries, while it exports heavier crudes to the U.S. Gulf Coast refineries. Those exports now could be unlimited.

"Venezuela is likely to snap up some of these barrels, too, to mix with their heavy crude to make a more marketable blend," said Kilduff.

You're not going to dramatically change your refiner estimates, but directionally, refiners lose a source of captive supply, and then I think the U.S. producers have to ultimately be a winner because they're less trapped. They have more potential buyers of product.
Dan Pickering
co-president, Tudor Pickering

The immediate impact of the news has been to narrow the spread between West Texas Intermediate crude and more expensive Brent oil, the international benchmark. In the case of the March futures contract, WTI was trading above Brent early Wednesday.

"It's potentially a new day for the oil markets as it relates to global movement," said Dan Pickering, co-president of Tudor Pickering. "The (West Texas Intermediate) market has been pretty influential before. it's an even more transparent process now. So I think that where before you didn't have to worry about U.S. volumes, now they do. It's more influential a little on the margin. Flexibility translates to influence and there's more flexibility."

Pickering said ending the restrictions would have not have succeeded politically if oil were at $100, and if exports were perceived to be something that could hurt consumers.

"Conceptually, the losers are the refining industry in particular. They had a more captive source of supply that's now less captive. Given where spreads are, there's not that much difference in the near-term numbers. You're not going to dramatically change your refiner estimates, but directionally, refiners lose a source of captive supply, and then I think the U.S. producers have to ultimately be a winner because they're less trapped. They have more potential buyers of product."

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Transporters of crude would also benefit, he said.

Lipow said the lower Brent price could make it more attractive for East Coast refiners to import African light sweet crude, a negative for North Dakota producers, which now ship crude east by rail. Refiners in turn could be hurt because of the captive cheap oversupply in the U.S. will ultimately find its way to other markets.

Lipow said refiners in the New Orleans area could import crude oil, into since Louisiana light sweet crude is now more expensive than Brent by $1.75 per barrel.

Crude oil producers could also look to export oil out of Corpus Christi, Texas, to Mexico and points further south because it would be cheaper to export that crude oil on a foreign-flag vessel than ship it on a Jones Act tanker to Louisiana or the East Coast. The Jones Act is a rule that permits only U.S.-flagged tankers to move U.S. oil between U.S. ports.

Lipow also said it appears that refineries on the West Coast may be competing with Asian countries for Alaskan North Slope oil.

In lifting the restrictions, the congressional negotiators included leeway for the White House to restore temporarily the ban in the case of a national security issue or if the supply to the domestic market is impacted.