Here’s the intro to this week’s issue of Cabot Undervalued Stocks Advisor. I left off the last paragraph, because it contains a specific stock recommendation for my subscribers.
Chief Analyst, Cabot Undervalued Stocks Advisor
President, Goodfellow LLC
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Foreign Crude Oil Refiners are Gobbling Up U.S. Crude Oil
I’m not an energy industry wonk, but the 2017 crude oil export situation is so vastly different than it has been for most of our adult lifetimes that it’s worth paying renewed and inquisitive attention to energy stocks.
As most of you know, my stock selection strategy focuses on numbers and price charts. Still, I glance at hundreds of news articles each week to keep abreast of major corporate, economic, political and stock market trends and changes. I was reading an energy industry analyst report from a famous Wall Street investment bank, and here’s what I found: U.S. crude oil exports are rising dramatically and rapidly. The report described a problem that was exacerbated by Congress, which nobody successfully resolved until over 40 years later! Here are the bullet points on the situation’s history and current events, along with my commentary.
• The problem began with a 1973 oil embargo by the Organization of Petroleum Exporting Countries (OPEC), which forced the U.S. to rely on its own energy production rather than purchasing foreign oil. The embargo severely harmed the U.S. economy and affected the daily lives of all Americans.
• President Gerald Ford signed the Energy Policy and Conservation Act of 1975 into law, making it illegal for U.S. companies to export crude oil without a license to all countries except Canada. (Energy companies were allowed to apply for exceptions to the law, which they mostly did not do, due to the costly, lengthy and unpredictable nature of the application process.) There were no similar restrictions on the export of refined oil products such as gasoline.
• By passing this law, Congress was trying to conserve U.S. oil reserves and discourage foreign imports.
I’m scratching my head at the lack of logic in that simple statement. If you force a country to rely solely on its own oil reserves, you’re going to use up MORE of its oil reserves, not LESS of its oil reserves. And this is just one more laughable reason that I oppose “big government.”
I am a huge proponent of both capitalism and limited government. You will never convince me that government interference in commerce can improve the free and fair flow of goods and services, jobs or the economy. Every time government steps in, business and life become more complicated, more expensive, less efficient and oftentimes hopeless. The only use I have for government is to pay them to protect me from criminals and war—which they are frankly not doing well, if my personal experiences are representative of the general population’s experiences.
How, exactly, was a law that limits OIL EXPORTS supposed to stop OIL IMPORTS? So instead of becoming energy independent, the U.S. actually became reliant on Canada, Latin America, the Middle East and Africa for our oil. One major reason that the U.S. became so heavily reliant on foreign energy sources was that, in the ensuing decades, bureaucrats in Washington D.C. implemented official and unofficial policies that limited and delayed U.S. production of oil, natural gas, nuclear power, coal and “green energy” sources.
In summary, prior to 1973, the U.S. was free to produce energy for domestic consumption, produce energy for foreign buyers and purchase energy from foreign countries. By the year 2015, only the latter of those three methods of commerce remained relatively unfettered. At that point, somebody in Congress finally convinced their peers to perform triage on the crippled U.S. energy industry.
• Congress authorized the export of U.S. crude oil to most countries without requiring a license in December 18, 2015, reversing the harmful effects of the Energy Policy and Conservation Act of 1975.
I was amused to read a January 2016 analysis of the U.S.’s new freedom to export crude oil, which predicted the export scenario to play out exactly opposite of what has actually occurred. The analyst stated, “There is little appetite or need for our oil to flow anywhere else,” with the article projecting all of the following barriers to commerce:
• West Texas Intermediate (WTI) crude oil pricing was just $1 to $2 per barrel cheaper then Brent, so there would be no motivation for foreigners to buy WTI.
• There was fierce competition in the crude oil industry between Russia, Saudi Arabia and North Africa, and the U.S. was unlikely to break into that market.
• The cost of shipping U.S. crude oil would be prohibitive for potential buyers.
• The lack of existing Gulf Coast crude oil export facilities would inhibit sales to foreigners.
• Even if some countries wanted to buy U.S. crude oil, there would certainly be very little demand coming from Asia.
Apparently, none of those projected impediments to crude oil commerce mattered because foreign refiners are now gobbling up U.S. crude oil.
• U.S. crude oil exports rarely exceeded 100,000 barrels per day (bpd) from 2000 to 2013.
• U.S. crude oil exports averaged 501,000 barrels per bpd in the first five months of 2016.
• Exports rose to averages of 657,000 bpd in August 2016, 746,000 bpd in January 2017, 1.0 million bpd in mid-February 2017 and over 1.0 million bpd by late March 2017.
• The number of countries served by U.S oil exports has increased from two countries in 2011 to eight countries in 2014 to 26 countries in 2016.
• Exports to Asia have quintupled as a percentage of total U.S. crude oil exports, from 5% in the first quarter of 2016 to 26% in January 2017. Destinations include China, Japan and Thailand.
• Recent pricing puts WTI at a $2 to $3 per barrel discount to Brent, while shipping costs are at a five-year low.
• The energy industry is actively building pipelines and export terminals to facilitate booming U.S. energy production and delivery of products, both at home and abroad.
It’s important to note that this major change within the crude oil industry continues to rapidly develop in favor of U.S. integrated oil companies, employment and the economy.
You can read more about my specific energy stock recommendations in Cabot Undervalued Stocks Advisor.
Neither Cabot Investing Advice nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks.
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