Producers Make the Case for Crude Oil Exports

The U.S. ban on crude oil exports has been a controversial topic. While producers have backed lifting of the ban, refiners have been opposed to any such move. Both parties have argued their cases, but the refiners' argument in favor of keeping the ban is flawed. The case for lifting the ban seems to be getting stronger as even the White House is apparently looking closely at the strains caused by the U.S. shale oil boom. Meanwhile, producers have stepped up their campaign to export crude.

Producers pile up pressure
Oil producers have been very vocal about lifting the ban on crude oil exports. That is not surprising, given that they have not been able to capitalize on the shale boom like refiners. The shale boom in the U.S. has boosted oil production. Rising U.S. oil production has created a glut as most of the refineries on the Gulf Coast have been configured to process heavier, sour crude and not the light, sweet crude produced in the U.S. For refiners this has meant higher margins since they get cheaper feedstock while the price for the finished refined products is linked to the global benchmark. Oil producers believe that lifting of the export ban would end the mismatch and move WTI prices closer to the global benchmark.

Continental Resources (NYSE: CLR  ) has been one of the producers that have been urging the White House to lift the ban on exports. Recently, the company's CEO Harold Hamm said he expects Congress to lift the U.S. ban on crude oil exports as soon as 2015. Speaking at an energy industry conference, Hamm said that producers do need to be able to export the light tight oil.

While it remains to be seen if the U.S. will lift the ban as soon as 2015, the White House is certainly looking at the ban on crude exports. 

With the case for lifting the ban becoming stronger, producers have taken the opportunity to pile on the pressure.

Report highlights benefits of lifting the ban
A new report backed by major producers such as ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) and Continental Resources has highlighted the benefits of lifting the ban on U.S. crude oil exports. The report by research firm IHS notes that allowing exports would improve the fit between crude production and refining capacity in the U.S. It further notes that lifting the ban would narrow the price differential between U.S. and global oil benchmarks. According to IHS, the lifting of the ban would allow companies to expand their production by an average of 1.2 million barrels per day during 2016-2030.

The lifting of the ban will not only boost production but also benefit the U.S. economy by creating or supporting almost 1 million jobs by 2018, the report adds. In addition, it would push gasoline prices lower, albeit slightly. Higher gasoline price has been one of the dangers highlighted by refiners if the ban on crude oil exports is lifted. The report from IHS, however, contradicts them.

The report also warned that if the ban is not lifted then the spread between WTI and Brent, which is around $7 now, will widen further. Lower WTI prices would eventually hurt U.S. oil production as there will not be any incentive for producers to boost their output. According to IHS, such a scenario will also put pressure on the finances of some producers. Indeed, there is an urgent need for lawmakers to review the ban.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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