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As the crude market continues to show considerable volatility, price gyrations are prompting another round of concerns over supply and production.
There isn’t a shortage to worry about right now.
But whenever we have some issues on the demand side, attention shifts to the supply currently available on the market. And it’s in this repetitive exercise that one of the major errors by analysts always occurs.
I have noted this shortcoming on several occasions.
A poor jobs report (like last Friday), bank games in tiny Cyprus, an industrial sputter in China, or another misgiving about how long the Fed can retain its QE policies usually get the pundits chattering about a crash in the energy markets.
Remember, such kneejerk reactions don’t tell us anything about what the market intends to do, since the data necessary to make such determinations are still three months away (or usually more) from being reported.
Rather, these become self-fulfilling judgments as additional lemmings join those already jumping off the cliff.
In the background, there’s also something else to remember.
Most of these predictions are just fronts for someone’s effort to short the market. Put simply, the more investors believe that the sky is falling with oil, the more profits these guys can make.
Such an approach has less value lately as two other basic tenets of the new oil market set in. First, the demand that these guys are attempting to deduce instantaneously is actually a global exercise.
They may be based on New York or London, but the demand drivers certainly are not.
And the worldwide demand projections from both Vienna-based OPEC and the Paris-based International Energy Agency (IEA) continue to trend upward with a spike developing over the past six weeks.
The second point, however, is of a much more recent origin.
And it’s this one that could lead to a major breakthrough here in the United States.
The Rise of Unconventional Reserves
The U.S. is currently experiencing a major shift toward production of its unconventional oil reserves. This tight (or shale) oil has certainly revised estimates of the import-export balance in the U.S. market, has already done so in Canada, and is shortly to make an impact in basins from North Africa to South Australia.
However, it is the American market that attracts the most interest.
Here, the development is furthest along, and the new volume is already producing estimates of self-sufficiency within a few decades.
It also advances another major breakthrough. We may finally see Congress allow the exports of crude oil from the United States.
There remains adequate supply internationally. That has led some shortsighted (in both meanings of “short”) to conclude that because there is potential for new sources, somehow that automatically means they show up immediately in a market that has no rise in demand.
In this line of thinking, oil prices collapse.
But not in our lifetimes.
The trading balance will be affected by the new volume, as it initially serves a local than a more expansive end-market. Remember, the end users of raw material crude are not retail consumers.
They are actually refineries.
And the progressively larger demand that needs to be satisfied is on a global scale.
So, will Washington start approving exports of new oil largesse to satisfy rising external requirements?
The Future of U.S. Crude Exports
At present, there are only two allowances for export.
The first involves heavy oil from California.
The argument here is that there is an insufficient domestic market for this is heavily discounted and provides an inferior grade. The second enables export if at least the same quantity of processed oil products are imported in return.
This is tolling, a process by which raw materials are made available for processing abroad with the finished product re-imported back. It has been used for years in metals (especially aluminum, steel, and specialty grades) as well as to balance oil cross-border refinery capacity and utilization.
Now there remains interest in procuring additional processed oil products for global resale from American sources. The U.S. trade in gasoline, low-sulfur heating oil, diesel, and high-end kerosene (jet fuel) has expanded considerably, with the last three seeing imports rise significantly of late. Providing the crude would improve the bottom line and profitability for the domestic companies on both ends.
Last week, the IEA commented on the subject. IEA Executive Director Maria van der Hoeven said that a Washington decision to allow oil exports would be “very helpful,” as constraints on international spare production capacity emerge.
In so doing, the IEA head introduced the global supply side issue that the short artists on Wall Street would prefer you know nothing about. The IEA for some time has been warning that global oil markets face a “zone of tension” because of limited amounts of unused crude that can be tapped in case of supply disruptions.
That pressure would be reduced if the U.S. changes its policy, van der Hoeven said.
Simply put, while there is no shortage of oil overall, there are regional constrictions likely because of geopolitical and market events. Price actually reflects this balance consideration more than any other single factor. Prices are not based on what it costs to obtain crude or product today.
Rather, the focus is on the price of the next available barrel.
Over the next few weeks, I will attend several meetings that focus on this very subject. Don’t be surprised if indications develop of widening U.S. interest in contracting domestic crude exports for additional oil product imports with some of that resulting volume finding its way into the re-export market.
It is going to be all about the balance, folks.
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