On Wednesday, congressional leaders unveiled the details of a massive $1.1 trillion budget deal.
At the heart of the deal is a measure lifting the US’ four-decade-old ban on exporting oil in most circumstances, which was put in place some time after a 1973 Arab oil embargo.
This particular measure is largely seen as a big win for Republicans and oil companies because it comes at a time when 1. Huge international cooperation on climate change is being discussed, and 2. America’s energy sector isn’t doing so well.
However, although it looks good in theory, this could actually create some problems for US oil in the short- to medium-term.
Location, location, location
In a recent note to clients, RBC Capital Markets’ commodities strategist Michael Tran writes that what’s particularly important to consider is where US barrels will ultimately end up after the export ban is lifted.
Right now, US exports primarily go to Canada, but Tran writes that the US will later specifically target places like Venezuela and Mexico — two countries that produce heavy crude and could benefit from the US’ light crude oil. The former has already been importing light barrels from West Africa to blend with their ultra-heavy grades, while the latter’s “less sophisticated” refineries prefer the lighter oil.
However, this might not actually be a good thing for the US. As Tran explains in his note, exports to Mexico could end up backfiring:
“The implications of increased crude exports to Mexico come at the expense of US gasoline exports. Roughly half of the 450 kb/d of gasoline that the US currently exports go to Mexico. Importing light crudes from the US means that Mexico will be able to increase its gasoline yield at domestic refineries and, at least partially, wean itself off of US gasoline. In other words, US crude exports to Mexico effectively cannibalise US gasoline exports.”
Unfortunately, there aren’t too many other buyers that the US can dump its oil on right now.
In Europe, the US would face “steep competition” from the Middle East, Africa, the Caspian Sea region, and Russia, all of which are geographically closer to European refineries and already have existing pipeline routes, Barclays’ Michael Cohen said in a note.
As for Asia, not only do US crudes face competition from African grades, but they would also need to be transported on smaller ships, which would take almost a week longer for them to get there, according to Cohen.
And lest we forget the current oil crisis.
“We have long noted that the Atlantic basin is already awash in light barrels from places like the North Sea, Nigeria, and other West African countries, all of which have been having a difficult time finding a home,” writes Tran. “Adding US Crude to the Atlantic basin mix only amplifies the competition.”
All in all, Tran forecasts that US crude exports will likely increase by only a few hundred thousand barrels a day.
“We do not see large-scale crude exports in the near to medium term given the potential dearth of buyers,” he writes.
And then there’s the infrastructure issue, too
Another issue that US exporters will be facing is the current infrastructure in the Gulf of Mexico, which, as Tran points out, is mostly designed to
import crude, not export it.
“Potential logistical issues cannot be underestimated given that physically moving barrels to docks, loading and securing tankers are several operations which have not been practiced given the long-standing ban,” he wrote in the note.
That being said, Cohen says that US export infrastructure is in the process of being improved:
“For example, the Louisiana Offshore Oil Port (LOOP) has recently started seeking shipper commitments for proposed marine vessel crude loading services by 2018 … Also, the port of Corpus Christi in Texas has been undergoing its biggest expansion in years,” he wrote.
Barclays’ Cohen optimistically points out that this lifting the export ban could help out US producers in the future. After all, assuming that oil demand will pick up in the future, then the lifting of this ban eliminates one obstacle producers may face down the road.
Additionally, although neither analyst mentions this explicitly, if producers start preparing infrastructure and strategies to export oil today because the oil ban was lifted, then they will be better positioned in the future. (Again, assuming that demand increases.)
But, regardless, it’s clear that there are still some major obstacles in the short-term for US oil.
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