U.S. Easing of Oil Exports May Foil OPEC’s Strategy

U.S. Shale Boom
Rig hands thread together drilling pipe at a hydraulic fracturing site located atop the Marcellus shale rock formation in Washington Township, Pennsylvania, U.S. Oil producers have been testing the prohibition on crude exports as U.S. output surged amid technological advances that have opened up shale rock formations to development in Texas, North Dakota and elsewhere. Photographer: Ty Wright/Bloomberg

The Obama administration’s move to allow exports of ultralight crude without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc.

A type of crude known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the oil, according to U.S. government guidelines published yesterday. That may boost supplies ready to be sold overseas to as much as 1 million barrels a day by the end of 2015, Citigroup analysts led by Ed Morse in New York said in an e-mailed report.

Saudi Arabia led the Organization of Petroleum Exporting Countries to maintain its production quota at a meeting last month even as a shale boom boosted U.S. output to the highest in more than three decades. That prompted speculation OPEC was willing to let prices fall to force some companies with higher drilling costs to stop pumping.

“U.S. producers are under the gun to reduce capital expenditures given lower prices,” Citigroup said in the report. “Now an export route provides a new lease on life that can further weaken crude oil markets and throw a monkey wrench into recent Saudi plans to cripple U.S. production.”

Current U.S. export capacity is at about 200,000 barrels a day, which could be expanded to 500,000 a day by the middle of 2015, according to the bank.

Oil Embargo

While the guidelines on the website of the Commerce Department’s Bureau of Industry and Security are the first public explanation of steps companies can take to avoid violating export laws, they don’t mean an end to the ban on most crude exports, which Congress adopted in 1975 in response to the Arab oil embargo.

“While government officials have gone out of their way to indicate there is no change in policy, in practice this long-awaited move can open up the floodgates to substantial increases in exports by end-2015,” Citigroup said. The U.S. produces about 3.81 million barrels a day of light and ultralight crude, according to the bank.

West Texas Intermediate in New York dropped as much as 1.4 percent today to $53.38 a barrel, down 46 percent this year. Brent, the global marker crude, slid 1.8 percent to $56.87 in London, bringing losses in 2014 to 48 percent. Both benchmark grades are headed for the biggest annual slump since 2008.

Oil producers have been testing the prohibition on crude exports as U.S. output surged amid technological advances that have opened up shale rock formations to development in Texas, North Dakota and elsewhere. The government earlier this year signaled a new way to export oil by approving permits for Pioneer Natural Resources Co. and Enterprise Products Partners LP to sell processed condensate.

The guidelines seek to clarify how the Commerce Department will implement export rules and follow a “review of technological and policy issues,” Eric Hirschhorn, the under secretary for industry and security, said in a statement.

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