Inside Investor with Dan Dicker
Exports Looking More Likely
How quickly has the oil market has changed? Since November of last year, oil predictions have run the gamut from complete wipeout to $20 a barrel to temporary distress and a quick V-bottom recovery to $75. As pessimistic as I've been on the length of time that depressed prices in oil will remain, I've been equally skeptical both of big up and downslides from current prices. I cautioned that oil wouldn't see $60 a barrel as prices drove into the mid-$50's and I'm again warning that oil will never see the $25-30 dollar disaster price that many are predicting now.
But what will stop a slide that now seems inevitable? With oil stockpiles continuing to build steadily, and with predictions that virtually every drop of storage will be gone by May, what can possibly stop a slide into the 30's or even the 20's? There are a few truly unprecedented 'relief valves' for oil and while they are unlikely, it's time to consider their possibility – both a dispensation for crude export by the US Commerce Department or a proactive export of barrels by oil producers themselves, even without government approval.
What happens when storage actually does run out? This is a question that I have been asked repeatedly recently and since it is entirely without precedent, I'm not wholly sure. But I do have some ideas.
I imagine that many conversations are already taking place in Washington between oil's lobbyists and the Obama administration about a temporary halt to the US crude oil export ban. There are plenty of ways to loosen the reins on export without completely opening up the floodgates. There could be a 6-month permit of a percentage of domestic production for each producer who requests it – still leaving pressure on the E+P's to cut production eventually but releasing some of the surplus that has virtually nowhere else to go.
In fact, it wouldn't take much export to relieve the storage issue, as an instantaneous arbitrage against euro grades of crude and a deep carry trade opportunity would emerge. It won't immediately solve the problem of domestic oil companies that refuse to curtail production, but it would buy quite a bit more time for them all.
Another idea is for oil companies to export crude even if they can't get approval from the US government. Don't laugh at this idea, as it isn't really unprecedented – BHP Billiton (BHP) has been doing it quietly for months already. Remember the exemption that Pioneer Natural Resources (PXD) received to export condensate, an only marginally processed crude oil? Since then, many other oil companies have been lobbying for similar licenses with little success. But BHP Billiton decided not to wait for the government go-ahead. They 'self-designated' some of their processed crude barrels as condensate and began exporting them, daring the US government to cite them and make them stop.
That hasn't happened yet.
With their backs to the wall, I can see several other oil companies also quietly 'self-designating' barrels as condensate, filling tankers and shipping them offshore – probably right to the Chinese, who are always ready to take and store cheap barrels at the right price.
How does this idea impact investment in the oil space? I've been trying to give the sense to readers that value exists in the sector, provided you're willing to slowly develop positions for the next two years and not expect any kind of turnaround from oil in the next several months. Just as your excitement shouldn't be piqued by a Fed-inspired oil rally as we saw on Wednesday, so too you shouldn't fear a crazy $20 Citibank call on oil.
We simply won't get there.
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Friday March 20,2015
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