News broke yesterday that the first two shipments of U.S. ultra-light oil or condensate have found buyers.
If you remember, we’ve been closely following condensate exports, and – as predicted – they have officially become the first step towards removing the ban on crude oil exports for the U.S.
South Korea’s GS Caltex and Japan’s Cosmo Oil (OTCPK: CMOOY) are the first companies to purchase oil produced in the U.S. since Congress enacted the ban on exports in 1975.
Details on the purchases include an undisclosed amount of condensate leaving sometime in late July – so probably sometime next week – to GS Caltex who has a 775,000 barrel per day refinery capacity. And Cosmo Oil will receive approximately 300,000 barrels in October.
As historic and important as these deals are, the first of their kind since the ban on exports I mentioned above, there still remains the fact that unrefined crude oil is still unavailable for export from the U.S.
Condensate is lighter and has to be minimally refined before it can be exported, but it’s only a matter of time before unrest in Eastern Europe and the Middle East prompts energy consumers like Japan, Korea, and Germany to call ever louder for the U.S. to share some of their shale oil bounty.
And as we approach record oil production numbers, eventually out-pacing Saudi Arabia’s production, look for Congress to talk about oil exports, and quite possibly lift the ban.
If this happens after the midterm elections in November, it couldn’t come at a better time. Take a look at this refinery data just released by the EIA…
As you can see, the U.S. just broke a record for the amount of inputs we have into our refineries. And if the upward trend continues it could mean that refineries wouldn’t have enough space to store and process all of the oil we produce.
And if that happens it could affect U.S. oil drillers who won’t be able to sell their oil and will lose their production rates, which could hurt their share prices if refiners can’t pick up the slack.
But thanks to these condensate exports, refineries have been able to offload some of their extra storage and make room for more crude oil. So for now there is a slight hedge against oversupply.
Of course, this could all change by simply lifting the ban on oil exports. But it would be a pipe dream to expect any such swift unilateral action from the government.
So you should expect to see the ban lifted incrementally much in the same way the government has slowly started approving LNG export permits to interested companies.
Although the step by step approach is slow, it does offer an advantage for investors: it creates a monopoly on exports. So, Enterprise Products Partners (NYSE: EPD) may not be a bad move since they, along with Pioneer Natural Resources (NYQ: PXD), are the only companies allowed to sell condensate abroad.
Remember though that the volumes will be minimal compared to our overall production.
That said, you can still bet that these exports and the more to come in the next few months will be the first warning shots against OPECs global market share.
Until Next Time,
Keith Kohl
