US refineries have seen their stock prices drop by as much as 10% this week after the Commerce Department gave Pioneer Natural Resources (NYSE:PXD) and Enterprise Products Partners LP (EPD) permission to export condensate, a rare exemption from the 40-year-old oil export ban. But this market swing may overestimate the important that the changing policy actually has on the US oil sector.
“In general, lifting the ban would be slightly positive for US condensate and oil producers, but slightly negative for US refiners who are investing in condensate splitters and benefit from local crude discounts,” write Oppenheimer analysts Fadel Gheit and Robert Du Boff.
Condensate exports don’t change the basic dynamic benefiting US refineries
Condensate usually gets lumped in with West Texas Intermediate (WTI) when US oil producers report total volumes, but Gheit and Du Boff estimate that it makes up about 10% of US production and that Eagle Ford condensate sells for $8/barrel less than WTI.
Producers will clearly benefit from the Commerce Department’s decision because they can now sell either to refineries either locally or abroad (mostly Europe), but refineries are as bad off as market moves make it seem. They still have a captive market for the other 90% of US oil production, and light crude production alone is expected to outstrip refinery capacity by the end of next year. Condensate exports ease the pressure a bit, but the basic dynamic is unchanged.
There’s even some upside for US refineries if condensate is redirected abroad. The rising percentage of condensate in feedstock mix has been an operational challenge for some refineries, reducing their run rates, and some would have needed to invest in condensate splitters to handle the changing mix.
“Although many US refiners have at least contemplated investment in standalone condensate splitters, most have taken a wait-and-see approach thus far because of the uncertain economics. The exception has been Marathon Petroleum Corp (NYSE:MPC), although its projects are focused around the Utica shale, where transportation costs make exports more prohibitive,” write Gheit and Du Boff.
US crude exports would bring down US gas prices
Eventually the Commerce Department will have to allow light crude exports or US oil producers will see their prices collapse. When that happens, the WTI-Brent spread that has benefited US refineries so far will tighten and possibly turn positive again. It’s possible that yesterday’s sell-off is pricing in the end of the export ban, but that’s unlikely to happen in the next year. .
While it might not be intuitively obvious, lifting the oil export ban would actually bring down US gasoline prices because they track Brent prices, not WTI, and a tightening spread will bring them gas prices worldwide.