U.S. Easing of Oil Exports May Foil OPEC Strategy
Comment of the Day

December 31 2014

Commentary by David Fuller

U.S. Easing of Oil Exports May Foil OPEC Strategy

The Obama administration’s move to allow exports of ultralight crude without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc.

A type of crude known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the oil, according to U.S. government guidelines published yesterday. That may boost supplies ready to be sold overseas to as much as 1 million barrels a day by the end of 2015, Citigroup analysts led by Ed Morse in New York said in an e-mailed report.

Saudi Arabia led the Organization of Petroleum Exporting Countries to maintain its production quota at a meeting last month even as a shale boom boosted U.S. output to the highest in more than three decades. That prompted speculation OPEC was willing to let prices fall to force some companies with higher drilling costs to stop pumping.

“U.S. producers are under the gun to reduce capital expenditures given lower prices,” Citigroup said in the report. “Now an export route provides a new lease on life that can further weaken crude oil markets and throw a monkey wrench into recent Saudi plans to cripple U.S. production.”

Current U.S. export capacity is at about 200,000 barrels a day, which could be expanded to 500,000 a day by the middle of 2015, according to the bank.

David Fuller's view

Commodity wars in the 21st century to date mostly involve knocking out export competition.  That is good for the global economy, corporations and consumers, provided countries are not overly dependent on exporting the commodities in question. 

President Obama has mostly opposed the US oil industry, despite benefitting from it.  However, led by the US energy sector’s technological advances, he is now going for OPEC’s jugular.  That means weakening the Saudis who have been leading the cartel forcing oil prices higher since the 1970s.  Obama’s second target is the ruthless and irresponsible dictator Putin, who is still a major threat to Europe and possibly beyond. 

If the Citigroup report mentioned and quoted above is correct, I may have to adjust my price expectation for Brent crude oil a little lower.  We certainly live in interesting times!

Lastly, permanently lower oil prices before the end of this decade has long been the second most important factor in my prediction for a secular bull market.  I was concerned that too few countries were using fracking but lower prices in real terms have occurred even faster than I expected. 

The most important factor for a secular bull market is, of course, the accelerated rate of technological innovation.  Technology is clearly the key to lower oil prices, and so much more.  Secular bull markets can easily run for a couple of decades, interrupted by numerous corrections and a cyclical bear market or two for Wall Street.  Nevertheless, there is never a better time to remain mostly fully invested than during a secular bull market.  Other stock markets will mostly follow Wall Street’s secular trend, albeit in a more volatile fashion, subject to governance and liquidity.  

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