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  1. Home
  2. / Investing
  3. / Energy

2 Reasons Why the Export-Ban Bill Will Weigh on Oil Prices

Between this Congressional bill and commercial hedging activity, there will be no major constructive moves in oil until 2016.
By DANIEL DICKER Oct 12, 2015 | 11:17 AM EDT
Stocks quotes in this article: DVN, COP, CLR

Back in the saddle after a week of traveling and meetings to find my oil company recommendations from two weeks ago (small wave to the crowd) have performed well; and to see 2 news stories that will strongly affect how we should manage those investments in the weeks ahead.

One is the massive increase in commercial hedging by shale-oil companies with the quick rise in oil's price back to $50 a barrel. The other is the politically charged Congressional bill to end the crude-oil export ban. Let's take a look at both more carefully, and see how they'll impact our beloved oil stocks.

A large part of the dynamic in the oil trade during the oil bust has always been the motivation of the commercial hedge participant in the futures markets. One of the major reasons I thought $30 oil was so unlikely was precisely because of these commercial motivations: it does a producer no earthly good to lock in prices at less than breakeven numbers, and $30 is well below breakeven for any shale play, no matter what presentations the exploration and production companies (E&Ps) trot out.

Fifty dollars is hardly better, and it represents only the barest of breakevens for the absolute core and most efficient shale plays in the U.S. But the massive increase in commercial activity in the futures market over the last week shows the desperate nature of U.S. shale players. They face overwhelming pressures accumulating over a year of depressed prices, bondholders and banks that are becoming leery of credit lines extended to the maximum and production schedules that are getting less optimistic by the day. The game for shale oil producers has devolved into a battle to just stay alive. No one is saying "keep calm and frack on" anymore -- and a couple of fresh hedges that delay an asset fire sale or outright bankruptcy scenario -- if only for 6 more months -- is being grabbed with both hands by many of them.

This, of course, continues to add fuel to my thesis of long-term, depressed oil prices: Lower than $50 doesn't help E&Ps, and higher than $50 brings an avalanche of frantic commercial sellers.

The newly passed Congressional bill to end the export ban was a political certainty even at the very start of the process. I was one of dozens of experts asked to add my opinions on the ban to the Agricultural committee crafting the bill. But I declined, recognizing the politically charged nature of it's construction. A bevvy of US oil producers -- including Devon Energy (DVN), ConocoPhilips (COP) and Continental Resources (CLR) -- made their case in Washington for freedom in entering the global marketplace and removing the almost-50-year ban on export. I wrote extensively on the crude oil ban in my book, arguing that it was designed to combat a very different set of market circumstances in the 1970s than we have today. Nonetheless, I feel the ban still creates many very useful limitations that enhance our energy production potential for the long term and help move us more quickly to a natural gas, and renewable energy, future. In short, Republicans were more likely to favor repeal, while Democrats were more likely to oppose it.

This is precisely how the bill is playing out, politically. However, I believe that my arguments against the repeal of the ban are far more nuanced than those being used to scrap it -- and in this election year, there will be serious pressure to at least move this bill towards the White House for possible veto.

But as the export bill gains momentum, it will put downward pressure on the price of oil, and this is why:

1. The prospect of fresh markets for U.S. producers gives another incentive to avoid necessary restructuring and, instead, again resume production. Next year looks like it will strip at least 600,000 barrels a day from U.S. supply, and I think the number could reach 1 million b/d. End the export ban and overnight that number will be cut in half.  

2.  I believe that an end to the export ban wouldn't move U.S. prices to meet global premiums, as almost all oil companies hope, but instead would push global prices down to meet U.S .benchmarks.

Between this Congressional bill and the activity of commercial hedging in the futures markets, the pricing forecasts I laid out in my book and continue to update, here, look spot-on -- with no major constructive moves in oil until the second quarter of 2016.

That leads to the question of what to do with our oil stocks -- particularly the ones that we bought at market lows in the last two weeks.

I think you know where I'm going here -- and I will comment more on this in my next column -- but as a preview, it will argue a minimum of trading around core positions and instead a search for opportunities to consolidate and add to them.

See you Thursday.

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At the time of publication, Dicker had no positions in the stocks mentioned.

TAGS: Commodities | Markets | Energy | Investing

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