Breaking News: US Relaxes Crude Export Restrictions

The US Commerce Department on Tuesday announced it started on December 8th approving a backlog of requests to export certain, specific forms of processed light oil. Crude exports have been banned since 1975. Tuesday’s announcement doesn’t end the crude oil export ban entirely, but the department on Tuesday did also issue long-awaited guidelines “outlining exactly what kinds of oil other would-be exporters can ship.” (Reuters)

Reuters reported this new action “effectively clears the way for the shipment of as much as a million barrels per day of ultra-light U.S. crude to the rest of the world.” Ed Morse, global head of commodities research at Citigroup, was quoted as saying US condensate exports could rise from 200,000 bpd to as much as 1 million bpd by the end of 2015, thanks to this new regulatory change.

For now, exports of untreated crude remain banned. Refined fuels such as gasoline and diesel, though, have not been banned from selling abroad. The question has been at what point crude becomes “refined,” and thus eligible to be exported. “Processed condensate,” a semi-refined form of the product, has been a gray area.

Reuters continued:

“Two energy companies, driller Pioneer Natural Resources and mid-stream firm Enterprise Products Partners, have been regularly exporting processed condensate since the summer after receiving a private permit from the BIS. But several dozen other companies that also raced to file similar requests were left waiting, with no timeline for action.”

Reuters further described Tuesday’s implications as follows:

“The administration's first serious effort to clarify an issue that has caused confusion and consternation in energy markets for more than a year will likely please domestic oil drillers, foreign trade partners and some Republicans who have urged Obama to loosen the export ban, which they see as an outdated holdover from the 1970s Arab oil embargo.”

Despite technical language in the new regulatory guidelines, Reuters reported, “analysts said the message was unambiguous: a green light for any company willing and able to process their light condensate crude through a distillation tower, a simple piece of oilfield kit.”

Citigroup said this may “throw a monkey wrench” into Saudi Arabia’s plan to curb American output, according to Bloomberg. At any rate, the newly relaxed regulations will create freer trade globally. Many domestic drillers have complained their inability to access global markets for their products forced them to sell at a discount here in the States. Incidentally, on Tuesday, the Brent/WTI spread narrowed by more than 50 cents to around $3.70 a barrel.

The issue is not that the US is producing more crude than we can consume. The issue is about allowing free enterprise and unfettered competition, allowing market participants to seek out their highest profit opportunities anywhere on the planet. The US produces about 9 million barrels of crude oil per day, while consuming about 19 million barrels per day. Freer trade regulations, though, will (theoretically) lead to better outcomes for both consumers and surviving producers.

Other Factors Affecting Oil Prices

One headwind – at least in theory – gets removed today, as year-end tax-loss selling is now behind us. Will the turn of the calendar ease some of the downward pressure on energy investments? Will this be what energy stocks need to find a new footing?

My view: Year-end selling was never the cause of the losses, and in fact, has probably contributed little or nothing to oil’s decline the last 6 months. Actually, energy funds have seen inflows for the last 3 or 4 months, even as the prices of most energy investments have plummeted. That said, I’m sure many individual, non-IRA investors did book losses in the last month or two. Perhaps some of those folks will be re-purchasing a substantially similar investment after their 30-day wash sale period expires sometime in January. My guess is, again, this activity will have little or no impact on oil and energy investment prices.

The main factors driving oil’s decline are well documented. Supply remains high relative to demand. In the markets, sellers have been dominating buyers. Markets tend to overdo corrections before it’s all said and done. One analyst opined on Tuesday that: “The oil market is probably out of balance by about 2%, and oil prices have dropped 55%.” Bloomberg TV.


In the meantime, forces are at work that will eventually rebalance and stabilize the energy world again. Some of the weaker shale participants will go away. China is taking advantage of low prices to bolster its oil reserves.

Calling a bottom for this oil crash is perhaps harder than any other crash in recent memory, as today’s market dynamics are brand new to everyone. In the old days, oil market participants could almost count on OPEC to curtail production during volatile times like these. Perhaps predicting a bottom was easier back then, when OPEC’s behavior itself was more predictable. In this new paradigm, though, no one knows just how oil prices will react. 2015 should be a very interesting year, and that’s about the only certainty right now. Stay tuned!

Keep an eye out for next week's post,
Adam Feik
INO.com Contributor - Energies

Disclosure: This contributor owns Enterprise Product Partners (EPD), but not any other stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Primary Sources:
-U.S. opening of oil export tap widens battle for global market
-Oil Price Decline Is `Unsustainable,' Gramatovich Says