Crude export ban may go away; along with WTI/Brent premium

While America feasted on turkey and mashed potatoes for Thanksgiving, the Organization of Petroleum Exporting Countries (OPEC) held its annual meeting in Vienna, Austria. A unanimous vote would have been necessary to lower crude oil production to attempt to slow the dramatic fall in crude oil prices we have seen recently. However, with Saudi Arabia opposed to cutting production to protect market share, no further production cuts were announced at the Vienna meeting. OPEC’s decision to refrain from action had an immediate effect on crude oil prices as shown in the chart below. Prices sunk as news of the decision reached news outlets around the world. On Dec. 4, Saudi Aramco, the Saudi Arabian national petroleum and natural gas company, cut prices of Arab light oil for customers in Asia and the United States, sending prices down further. West Texas Intermediate (WTI) and Brent crude are trading at five-year lows, making market participants wonder where the bottom is.

Source: http://www.zerohedge.com/news/2014-11-27/wti-crude-crashes-below-70-first-time-june-2010 

In the past, OPEC decisions used to make huge waves in the energy sector, but with OPEC’s current market share in oil production down to 43.4%, their influence is shrinking. In fact, the United States has out-produced Saudi Arabia, OPEC’s biggest player, for 22 straight months in a row. In August 2014, the United States exceeded Saudi production by some 2.5 million barrels.

We are already seeing that falling oil prices can be a two-edged sword. While it may constitute a form of economic stimulus especially for lower income households, countries dependent on revenues from oil exports are feeling the pain. Venezuela and Iran, for example, are calling on OPEC to cut production in the new year to stabilize prices. However, on Dec. 3, Saudi Arabia was quoted as saying they see oil prices stabilizing around $60 a barrel, suggesting that they will not push for supply cuts in the near term even with oil falling further. This indicates that the Saudis will fight hard to protect market share; their primary focus is not on helping struggling OPEC member states. And even if Saudi Arabia should soften its stance, OPEC making any sort of cut in the 500K to 1 million barrels a day range may not be sufficient to curb the current slide in prices.

I have written about the WTI/Brent spread in the past and believe we may be closer to these two benchmarks trading at parity. With U.S. oil imports at their lowest levels since 1995, and output at a 31-year high, oil producers are looking for better prices abroad. The U.S. export ban enacted in the 1970s is currently preventing U.S. producers from exporting at a significant level; however that may change soon. While the effects of lifting the ban are unclear, lawmakers in Washington are starting to debate the issue and are scheduled to hold a hearing this week.  Should the ban be lifted, the injection of high-quality American shale oil into the global market should bring Brent and WTI crude back to parity as we saw in 2010 (see chart below). With the export curb in place or not, both WTI and Brent are under heavy pressure as the world is awash in oil. WTI closed the week ending Dec. 5, under the $66 mark, down 9 out of the last 10 weeks and the lowest weekly close since July 2009. Depending on your market sentiment and individual risk management needs, there are many ways of trading the energy markets using futures and options on futures.

Outlooks and opinions included are those of the author and not necessarily RCM

About the Author

Jack Malone is a Futures and Options Advisor at RCM Asset Management with a focus on the metals and energy markets. Jack can be reached at jmalone@rcmam.com