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Unimaginable even a few years ago, booming domestic supplies have major traders applying for...
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Thursday, October 11, 2012, 3:43 PM ETUnimaginable even a few years ago, booming domestic supplies have major traders applying for licenses to export substantial amounts of oil from the U.S. for the first time in decades, reports the FT. Exports would not only affect worldwide trading patterns, but also put pressure on the price of Brent crude, which currently sits at a hefty premium to the U.S. benchmark.
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This obviously confirms lack of much demand in the US, which is likely indicative of declining consumption in tandem with increasing production. And of course should be bearish for crude price...
The biggest issue in North America seems to be the inability to get cheaper WTI priced product to the East Coast which typically pays more for crude and refined products. It seems, if I remember correctly, because of things like the Jones Act and lack of pipelines and efficient transportation, the Eastern US tends to pay Brent prices instead of WTI.
Now, instead of fixing the problem created by lack of infrastructure and outdated law, companies want to ship out excess product to other markets.
The article makes an interesting point that the Jones Act effectively makes shipping oil up the East Coast cost $4.55/brl as opposed to foreign flagged ships costing $1.50/brl.
It seems oil could/should be cheaper in the event of an adjustment to the Jones Act or pipeline buildout enabling access to WTI priced product to the East Coast.
The long term trend however is clear: http://bit.ly/RTK52D
And most observers apply a very one dimensional, linear, perspective to energy consumption. Productivity/energy consumption, and consumption/GDP are also important metrics to watch, outside of assuming that the world will need a very linear barrel number to accommodate a higher population or a wealthier one.
There are a number of developments worldwide all contributing to steadily increasing the rate of deceleration in demand growth.
The good news is that our government is working to reduce wealth and since we have fewer jobs (and therefore don't have to drive) I guess we are leading the charge to the bottom (all the while China, Korea, and other parts of Asia get wealthy.) Boy it feels good doing the right thing.
even if this was true, but it is not. it be just like saying, lets not build highways because the friction from cars tiers wears them down and they unusable after a few years!
Patrick Henry nailed it: "United we stand, divided we fall. Let us not split into factions which must destroy that union upon which our existence hangs".
Divided we are falling.
Not to say we shouldn't have seen this decline in living standards coming for a couple of decades or more.
The question will be who is buying it. Europe is heavily captive to Brent and I suspect putting WTI on its market is more likely to pull Brent down.
Much North Dakota oil is "exported" to Canada to get into the big pipeline that comes right back into the US. It's mostly paperwork.
It's approx 2m barrels that come from the middle east on average or thereabouts, that's a number we can likely wean ourselves off of. Of course, we buy there for more than economic reasons, and those reasons are unlikely to dissappear short term.
Anyway, reports out that Iraq may reach 6mln barrels by 2020 http://bit.ly/Tch7bf , compare that with a pre Saddam high of under 2mln and a current production of 2.7mln. Then there's Libya, who's production the West has also basically taken control of. There should be similar growth there compared to the Qaddafi production.
There are geopolitics at play that encourage us to 'trade' for their oil, and those haven't and likely won't drastically change anytime soon.
You should note I was practically emotionally scarred when oil broke that level several years ago as it absolutely crushed my business sending it into the red for two years (2008-2010).
In '08 virtually none of the largest property managers in the greater NYC area were hedged and everyone got hurt pretty bad, I attribute part of the meteoric rise in oil precisely to the fact that everyone was buying spot and fuel conversions were just not available.
Since then, I've seen nothing BUT conversions. The oil companies are doing them, the plumbers are doing, all the property managers are doing them. And demand for NG is growing but capacity is unavailable, that's why we still use oil, the utility asks us to switch over to oil during high demand.
At the same time every demand metric for oil is decreasing, from transportation, to utility use, commercial consumption, etc. Over the past few years, however we've encountered a few interesting events keeping oil afloat, like for example Japan's Tsunami. A lot of electricity demand capacity was replaced with diesel. So it was in Myanmar as well. In fact most times after a natural disaster there is a spike in diesel as its the most portable form of generation. I can't speak specifically to the size of the demand generated by those events, but you had inflexible demand in the face of constrained supply. And that can happen again, but that's the nature of transition: it's bumpy.
I think the headwinds against oil are huge, short term Japan is just in the process now of powering off its diesel generators and returning to nuclear while growing coal/gas capacity, for example, and any resolution of the Iran situation is going to put a ridiculous amount of oil currently sitting in tankers back on the market in hurry.
Longer term the demand destruction is outrageous. A lot of commercials are still in the process of cutting back on oil amongst other expenses in the face of stagnant revenue growth but mostly because gas is 50% cheaper. It's a drawn out process because it's capex and a lot of folks expected oil was in a temporary spike.
But it amazes me how sticky oil has been over $80 - I've been buying oil for almost 20 years in a variety of economic conditions and I find just how far oil has broken with its prior history in the past 4 years amazing.
I can't even begin to describe how many catalysts I see from how many different sides pushing down oil, but one thing I know for sure is that I don't know if I can time it. But the absolute answer is yes, it has to.
You take all the energies and put them together, and oil is grossly overpriced next to all of them, it sticks out. It has certain conveniences, like I described above, and that's one reason it's been sticky. Another is the folks who use it as a currency hedge, or the perma-longs who view it as an asset class like gold; another is commodities market deregulation in 1999-2000. Another is that people still use the bubble number of $147/barrel in their trading models.
In the meantime all the gas producers - (CHK) comes to mind - in the US are increasing their oil production, US is at a 14 year production high, Europe and S. America are transitioning - albeit slowly - to nat gas for transportation, most of SE Asia is growing energy production in anything but oil based capacity.
So I don't think oil can stay sticky forever, and I think - even though like I said I don't like to time it because I have absolutely been wrong before - at the end of this heating season we will see an inflection point in oil.
I back up the truck in 09 on XLE, XES and a variety of oil stocks when the bbl cost was around $50. Only RIG has turned out to be a complete dog.
Recent swing low under it was $77 on 6/28 followed by a hard $7 move up on demand, so there's definitely interest in that area.
And there's the rub: I think there's a lot of consumers (as in, not traders, heh) are happy buying at under $80 and will do so immediately anytime crude price moves there.