Can US crude oil export alter market dynamics?

The Obama Administration has given the first permission in four decades for the export of unrefined American crude. The shipments could begin as soon as August and are likely to be small. For now, the rulings apply narrowly to the two companies, which said they sought permission to export processed condensate from south Texas’ Eagle Ford Shale formation. It is not clear how much oil the two companies are allowed to export under the rulings.

The approval is likely to encourage similar requests from other companies, and the Commerce Department is working on industry-wide guidelines that could make it even easier for companies to sell US crude oil abroad.

Senator Lisa Murkowski, the top Republican on the Senate Energy Committee said the move on condensate was “a reasonable first step that reflects the new reality of our energy landscape,” urging the White House to fully lift its ban on crude oil exports.

Though the US has decided to allow export of a slightly-refined energy product, called condensate, the volumes allowed will be low and the impact is likely to be minimal on markets. However, over time it could be a game changer.

The road to crude export

Under rules imposed after the Arab oil embargo of the 1970s, US companies can export refined fuel such as gasoline and diesel but not crude oil itself except in limited circumstances that require a special license. The embargo essentially excludes Canada, where US oil can flow with a special permit.

Lawmakers enacted the ban after Arab countries declared an embargo on shipments to Western nations because of their support for Israel. The embargo caused oil prices to quadruple and led to rationing at gas stations across the US.

But as drilling companies tap shale formations across the US, ultralight crude prices have fallen as much as $10 or more below the price of traditional crude. So producers have been worried what they will do once they saturate the US refineries that can handle their light oil. As a result, the producers have lobbied aggressively to relax the export ban, saying they could get a higher price from foreign buyers than from US refiners.

Recently, global oil prices have surged because of the political turmoil in the Middle East and Africa–the march of Islamic militants in Iraq, the stoppage of oil exports from Libya, and the crude theft and vandalism in Nigeria, taking some 3.5 million barrels a day of oil production capacity off the market, out of the 90 million barrels a day consumed globally. 

As of now, production of ultralight crude in US stands at about 3 million barrels. The calculation by US Commerce Department is that if much of that volume were shipped abroad, it would surpass the exports of Iraq and other supply outages caused by geopolitics that undermine global oil prices. That could ultimately benefit US consumers by stabilizing pump prices.

Shares of US oil refiners tumble

US refiners, who were some of the biggest beneficiaries of the non-export of US crude, saw profits rise in recent years. US crude have traded at a bigger-than-average discount to world prices. This has proven to be a bonanza for U.S. refineries but a frustration for crude oil producers—specifically, for extractors of the extremely light crude, or “condensate,” largely derived from shale through the new technologies—because the U.S. surplus of condensate drives down their domestic prices.

In addition to producing fuel for US consumption, American refiners in recent years have boosted exports of gasoline and diesel, which have been allowed. As such, they compete with refiners in other countries to supply the global fuel market. 

Analysts believe that if US crude are shipped to the international market, domestic crude prices could rise and result in higher costs for refiners. Investors unloaded shares in US crude-oil refiners in a selloff highlighting the potential threat that US oil exports pose to the sector. Shares of Valero Energy, the largest U.S. refiner, dropped 8.3 percent, their biggest daily slide since November 2011. Those of PBF Energy tumbled 11 percent, Phillips 66PSX fell 4.2% and HollyFrontier declined by 6.7 percent. 

The selloff reflected investors’ concern that US refiners will lose some of their competitive edge gained in the past years if exports of crude become common.

Nearly 20 refining projects with capacity of more than 900,000 barrels a day have been proposed and are in various stages of development. If the volume of minimally processed condensate exports reaches a large scale, it could undermine investments by several companies in refineries and mini-refineries known as splitters that were made based on the companies’ previous understanding of the law.

Asian market could be a future battlefield

The US shale oil boom of recent years is expected to soon make the country the world’s top crude producer, surpassing both Saudi Arabia and Russia. 

Asian countries, which get most of their oil from the Middle East and Africa, would welcome extra US supplies. Three new condensate splitters, a type of refinery, are due to open this year in the region able to process a total of 350,000 barrels per day.

Analysts believe that it will be a few years before US supplies hit the market, given the time needed to pin down details such as specifications and freight costs. 

FRANK UZUEGBUNAM