The United States is awash in domestically produced crude oil. U.S. crude oil inventories simply hit a 26-yr excessive. Heck, just last yr North Dakota passed Ecuador’s manufacturing and Ecuador is a member of OPEC. Moreover, the U.S. is expected to takeover the crown as largest international oil producer from Saudi Arabia as early as 2020. The questions that keep developing are two-fold. “Why hasn’t the price of oil fallen and why are gas prices nonetheless so high.” The answer is solely, politics and logistics.
Forty years ago, the Power Coverage and Conservation Act was enacted. The thought was for essentially the most part, to ban crude oil exports thus moving away from OPEC sourced production and in the direction of primarily Texas based production throughout the oil disaster of the 1970’s and the OPEC embargo. Whereas the intention was noble at the time, it is evident that the worldwide power manufacturing landscape has shifted. We’re rapidly approaching the point of power independence. Our manufacturing is already eclipsing imports on the weekly level regularly. In reality, the manufacturing growth right here in the U.S. has helped to equalize a world production decline in every of the last three years.
This is the place the loophole within the Energy Policy and Conservation Act comes into play. Whereas crude oil itself can’t be exported, refined petroleum products can. Subsequently, the oil refining companies have had entry to each domestic and world markets for the final forty years while the actual drillers have been handcuffed by an outdated policy. The oil drillers, held captive by laws have seen the value of U.S. crude oil decline compared to the world market as domestic provides have increased. The refiners have used the oversupplied home scenario to their benefit. They’ve been buying domestic oil on the cheap and reselling the refined petroleum products at elevated global market prices. Score one for the refining industry.
Ironically, altering outdated legislation might not even be essential to equalize costs. The first glut is confined to the Midwest. Canadian oil is available in through the Keystone pipeline together with North Dakota and Montana’s. All of it finally ends up in Cushing, Oklahoma. Pipeline enlargement would ship this mild candy crude to extra refineries, which would balance out the difference between the east and west coasts versus Midwest gasoline costs. Pipelines just like the Gulf Coast Pipeline Challenge, the Houston Lateral Project and ly, the Keystone enlargement could double the Gulf Coast refining capacity and help carry West Texas Intermediate(WTI) costs again inline with the Brent crude international benchmark.
Alarmists have used the previous instance to illustrate that gas costs would rise, “all through the American heartland.” However, it’s totally straightforward to see the population shifting from the American heartland to the coasts. Lifting the export ban would actually decrease the price of Brent crude, which could be a huge profit to coastal refiners, which already import and refine heavier Brent crude, as well as their basic populations. The straightforward reply is that it will create a more efficient global market and an efficient market lowers prices for everyone involved. Thus, the refiners would be the loudest voice of protest.
The embedded bias within the domestic crude oil market that has been exacerbated by the growth in the fracking industry creates a peculiar set of trading biases. Worry within the crude oil market is all the time measured in shock price spikes. This can be measured by commercial traders’ (refiner) shopping for locking in future provide. Commercial traders were large consumers on the 2007-2008 rally and were additionally the biggest sellers at the highest. Therefore, it’s prudent to notice that their current place is the least bullish since August of 2005. We have used this bias to commerce the brief aspect of the discounted WTI contract for years. You can see our typical chart setup forcommercial short promoting in WTI crude, right here.
