U.S. lawmakers may now be only months away from lifting a four-decade-old ban on most oil exports, relieving a trade constraint that as recently as a year ago seemed at risk of choking off a domestic drilling boom.

At the same time, the outlook for oil prices in 2016 and beyond suggest it may be years before traders care.

U.S. benchmark crude oil futures for March have strengthened swiftly this week to their firmest versus global benchmark Brent since the early days of the U.S. shale oil boom, all but eliminating the price gap that would have made exports profitable.

The momentum for change in Washington is at odds with the shifting outlook for global oil markets. A key House of Representatives committee on Thursday easily passed a bill to repeal the ban, setting up a full House vote within weeks.

After years of swelling U.S. supply that depressed domestic crude prices relative to the rest of the world, putting the topic of export restraints on the political agenda in Washington, the tables are turning.

“There will be no exports at these price levels. It’s already uneconomical to export to Canada and Mexico. Of course you can’t export to the rest of the world,” said Amrita Sen, chief oil analyst at Energy Aspects in London.

Most market attention over the past two weeks has focused on the shrinking discount for immediate-delivery West Texas Intermediate, the benchmark U.S. crude, versus global marker Brent. The spread between November futures has narrowed by more than $3 to under $2 a barrel, the tightest since January.

That shift has been generally attributed to short-term factors including a surprise decline in weekly stockpiles at Cushing, Oklahoma, storage hub. Many analysts expect prices to widen again as refiners close for maintenance and imports rise.

Long-term prices, which are less affected by short-term factors like refinery maintenance, are also converging, suggesting a more lasting shift that could slam shut the export arbitrage for years.

U.S. production may fall by as much as 10 percent, or 940,000 barrels per day (bpd), by the middle of next year as drillers cut spending in the face of sub-$50 prices, the U.S. government has forecast. Global supplies may grow next year as easing sanctions on Iran unleash pent-up barrels and longer-term projects in places like Canada and Brazil come online.

On a six-month-forward basis, the Brent/WTI spread has narrowed by $1.50 to nearly $3 a barrel this month, the smallest since early 2011 apart from a brief period this January. It traded between $6 and $4.50 most of the year. Last year, with U.S. output booming, it averaged nearly $11.

To be sure, there is an alternate interpretation for the compressed spreads: Traders may be betting on a political shift, not a fundamental one. If the ban were lifted, WTI and Brent prices should once again converge, erasing the gap. However analysts say that is the much less likely explanation.

“The market is adjusting because of supply and demand, and that overshadows the policy change – for now,” said Michael Cohen, head of energy commodities research at Barclays.

POLITICAL WINDS

On Thursday, the energy committee of the Republican-controlled House voted 31 to 19 – with backing of three Democrats – to approve lifting the ban. Although the White House said it would not support the measure, more and more lawmakers are lending support to the idea.

Bob McNally, founder and president of Washington-based consultancy The Rapidan Group, says it is a question of when, not if, the ban is scrapped and it could happen this year if enough Senate votes can be mustered.

“There are over 60 votes in favor of lifting the ban, but not yet 60 votes on a specific deal to do so.  The moderate Democrats needed to get it done want something for it,” he says.

Others such as Kevin Book from ClearView Energy Partners see longer odds due to increasing partisanship and 2016 elections.

For oil traders, however, it has become an almost moot point.

A year ago, with the U.S. shale revolution in full swing, the Energy Information Administration was predicting total U.S. oil production would grow to more than 9.8 million bpd by this December from just under 9 million bpd.

Companies like Pioneer Natural Resources and Continental Resources Inc stepped up lobbying to ease the ban, fearing they would be selling their crude at deeper and deeper discounts.

Instead, collapsing oil prices have turned the boom to bust, with output falling every month since April. The EIA now expects production this December of less than 9 million bpd, and in recent weeks oil traders have grown much more convinced that deep spending cuts are quickly translating into less U.S. oil.

The market “finally recognizing that U.S. shale production peaked in April, has fallen materially since then and will fall materially into next year,” said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston.

 

Previous | Next