Believe it or not, something good has come out of this oil-price collapse for U.S. producers. The lifting of the oil export ban may not seem terribly important today, but in the coming decades it will be. Here's why.
Whistling past the graveyard?
Continental Resources (NYSE: CLR) CEO Harold Hamm, appearing on CNBC resectly, declared that Saudi Arabia's strategy to drown the United States in oil isn't working. In fact, Hamm believes the Saudi strategy has backfired, as it has played a huge part in the repeal of the 40-year-old export ban.
Hamm is right that the repeal of the export ban is significant, but it's hard to agree that the U.S. isn't drowning in oil. This chart from the Energy Information Administration shows the level of crude oil in storage in the United States:
With 480 million-plus barrels in storage, the United States may not be drowning, but we're at least up to our necks.
For Hamm, it can't be easy to go out and talk tough about the Saudis. Back on Nov. 5, 2014, he led Continental to make the decision to cash in its oil hedges based on the belief that oil prices had to rebound.
The price of oil on Nov. 5, 2014, was $78 per barrel. As of Jan. 15, the price of Bakken crude oil was $20 per barrel.
Bakken oil generally trades at a discount to WTI, but the point remains that Continental Resources, like most producers, doesn't have the balance sheet to withstand these kinds of oil prices. At the end of the third quarter, Continental reported having $7.1 billion in long-term debt.
Hamm's decision to lift the company's hedges long ago has left the company very exposed.
At higher oil prices, the export ban is a big deal
The lack of interest in the repeal of the oil export ban is understandable. All it means today is that American producers get another dollar or two for their oil.
In the future, the dollar impact could be much larger.
Before the oil-price collapse in the middle of 2014, the spread between WTI and Brent was large:
At one point in 2011, WTI was trading for $28 per barrel less than Brent. That's hard to imagine today, when both of them trade for $28 in total.
The cause of the WTI discount was that the American refinery complex was (and still isn't) equipped to handle the influx of lighter and easier to refine oil that shale wells produce. Believing that American production was in permanent decline, the U.S. refineries had been built so that they could handle heavier grades of crude that would be imported from Canada, Venezuela and the Middle East.
With the refineries unable to process the light, sweet crude fast enough, and with exporting it out of the United States banned, WTI prices came under pressure as inventory levels at Cushing, Okla., surged.
Going forward, the American producers have plenty of challenges, but the ability to export light oil isn't one of them. There are plenty of refineries overseas that have a large and growing appetite for it. These companies are now on a level playing field with their global competitors.
What does this all mean for investors?
For the short-term investor, the lifting of the oil-export ban doesn't mean much. Oil prices are probably going to stay low until we start to see some of the excess inventory worked off. That's going to take some time. How long is difficult to say.
In his appearance on CNBC, Hamm indicated that he believes oil market supply and demand will eventually be back in balance and oil prices will rise as a result. His last major prediction on where oil prices were going didn't work out very well, so perhaps this one will do better.
For the long-term investor interested in this sector, the best-capitalized shale oil producers are the companies most certain to benefit from the lifting of the ban. With $7.1 billion in debt, Continental may not be one of those. I wouldn't count on it, anyway.
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