The U.S. Commerce Department allowed more U.S. oil exports this week triggering a big sell-off in U.S. refinery companies. The move was welcomed by domestic exploration and production companies, which have seen lower proceeds for their condensates given the discount of WTI compared to Brent.
With future exports putting pressure on the size of this discount, things might be even better for production companies going forward. The move could put pressure on earnings of U.S. refineries which sold off quite aggressively on the news. The move will not occur overnight, but momentum to abolish the export ban overall might be an important shift in the industry dynamics for the long run.
As known by now, U.S. companies are allowed to export domestically produced oil as long as the crude is lightly processed. This ended the impact of the law which prevented the export of most sorts of petroleum shipments for decades.
This does not mean that the U.S. will become a big exporter overnight, as the commerce department has only widened the definition of a refined product eligible for exports. The entire ban on exports is not lifted, just the specific light crude called condensates.
The ruling came after Pioneer Natural Resources (NYSE:PXD) started a petition to approve ultra-light oil exports which has been stripped of gas to stabilize the oil ahead of transportation. Under this minimal processing process the light oil, also known as condensate, can be exported to overseas markets at premium prices, as oversupply has depressed domestic prices.
Oil which passes a distillation tower, which is a preliminary form of refining, is no longer considered to be crude oil and therefore can be exported. Pioneer already has distillation units and anticipates to export some of the condensate from the Eagle Ford Share abroad. Distillation towers tend to be relatively cheap, costing just a fraction of the cost of a refinery.
No Game Changer, Changes Are Coming
On the back of the energy revolution in the U.S., the spread between Brent futures and Wext Texas Intermediate Crude has been increasing in recent years, causing relatively depressed prices for domestic oil producers while creating good times for refineries.
The move does not allow for the spread to be arbitraged away immediately. Of course the infrastructure to start huge exports is not ready overnight and transportation costs will play a key role as well.
Note that the decision does not allow for a complete export of oil and related products, although momentum to a complete free flow of energy products is building. The breakdown of the rules came after they were instated back in 1975 following the Arab Embargo.
Impact For The Economy
Protestors argue that the move could mean higher oil prices and gas prices for U.S. businesses and consumers. However, note that producers will receive more for their oil, which might push up WTI prices and might push producers to develop fields which are currently uneconomical. Such moves could boost production and employment, which would be very good for the economy.
Given the boom in U.S. oil production, with the country becoming less reliant on oil imports the move is much less political sensitive than it was in recent years. If the boom continues, self-sufficiency or even net exports might be in sight in the coming decades. Despite the improvements in production and relatively stable demand, the U.S. remains a large net oil importer at the moment.
Refinery Operators Suffer, Production Companies Gain
Refiners could see lower profits if they need to pay higher prices for their raw materials. As such, prominent firms like Valero (NYSE:VLO) are against the move, pointing towards the still large U.S. oil imports at the moment despite the energy revolution.
Shares of Valero fell by 8.3% on Wednesday on the back of the news. Other prominent refinery names like Tesoro (NYSE:TSO), Phillips 66 (NYSE:PSX), Marathon Petroleum Corporation (NYSE:MPC) and HollyFrontier (NYSE:HFC) saw its shares fall between 4 and 7%.
The market seems to recognize the importance of the news, as witnessed in the stock price moves on Wednesday following the news announcements. The moves are quite substantial to say the least.
Note that implications for both producers and refineries depend heavily on the actual locations of the production facilities, as well as shipping costs for exporting of condensates or even crude oil potentially in the future. What is clear that the news is net positive to producers and negative for refinery companies.
You are advised to do some serious research regarding the implications for your individual investments in the energy sector. Good luck out there.
Disclosure: The author is long TSO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.