My wife and I just returned home from a family event in Seattle, and something there caught my eye that will have a big effect on energy investors.
Something is now afoot in the Pacific Northwest that is going to change how we think about pricing oil—and this new wrinkle is going to provide a range of fantastic opportunities for investors.
It revolves around the prospect of U.S. oil exports and the changes that will be needed to make it all happen. . .
Preparing for a Generational Change in U.S. Oil Exports
These preparations are already underway. In fact, entire networks are now being restructured to increase the transport of oil to the West Coast for export to Asia.
Of course, this will still require an act of Congress, since the government restriction against exports in the wake of the oil embargo of the early 1970s is still on the books.
But as I have mentioned before, that change is certainly coming.
And from the looks of what is taking shape among pipeline administrators, tanker companies, port authorities, and railways, the broad-based assumption is that this decades-old policy will be revised soon. Local officials in port cities throughout the Pacific Northwest are counting on it.
But it's the companies that will haul, offload, and transport the oil that are moving first. Several major industry meetings are now scheduled on the West Coast on the subject, whereas last year there were none.
According to veteran officials at the Port of Seattle, the expected revisions will be one of the largest changes in American export policy (and shipping priorities) in several generations.
Of course, the West Coast will not be the only area affected. But it does have the advantage of being the ready loading point for deliveries to Asia. And the Asian market is where the energy expansion over the course of the next two decades will be the most pronounced, offering the highest profit potential and greatest pricing differentials available anywhere on the market.
All of which adds up to the massive move that is now taking shape to start sending crude out of the United States.
Growing U.S. Production Alters the Balance
What makes all of this possible, of course, is the resurgence of U.S. oil production. The onset of huge unconventional (shale, tight, heavy) oil reserves has caused our concerns about sufficient oil supplies to become a non-issue.
Meanwhile, the market offering the highest rate of return is foreign, especially in those regions with developing economies and accelerating populations. This is hardly news, since these regions of the world have been driving oil prices for some time now.
What changes the equation this time around is where that supply will be sourced.
As it stands, Asia currently pays a premium for deliveries of Saudi and other OPEC oil. Put simply, it costs more for an Asian end user to secure crude than for the equivalent consignment to be delivered just about anywhere else on earth.
Despite everything that has taken place, it is still cheaper to receive a crude oil tanker in Galveston than it is in Japan, China, or India. The so-called "Asian premium" has long been a fact of life to do business there.
However, some new additions are now about to upset that balance.
One is the growing use of the East Siberia-Pacific Ocean (ESPO) export pipeline, which moves Russian oil for export and also has a spur for the direct transit of crude by land to Northwest China.
As this develops, ESPO will also introduce a new crude benchmark rate (also named ESPO). In fact, these flows have already become sufficient enough to justify pricing quotes from Argus in London. What's more, the oil is of better quality than Saudi crude (lower sulfur content) and, once the confidence in regular deliveries builds, it should begin to cut into the additional price paid by Asia.
But this is not going to happen overnight.
Even still, Asian consumers would certainly welcome another major oil exporter that was in a position to compete with OPEC and Russian sources. The continent is certainly going to need all of the oil it can secure.
Shifting the Flow of Oil to the Pacific Northwest
That's why what's happening in places like Seattle is so important.
The combination of U.S. and Canadian production becoming available—all without sacrificing any domestic needs—is tailor-made for where the energy balance is heading. As the energy balance shifts toward Asia, so also will the exports.
Already, the movement of crude south from Canada to the United States by rail has emerged as a major change in North American transit corridors. Plans are underway to build central offloading facilities to move oil from railcars and pipelines to tankers headed across the Pacific.
At some point, the Keystone XL pipeline will be approved and construction of the last major leg in the largest North American crude pipeline network will finally get underway.
By that point, the ability of the United States to be effectively self-sufficient in both oil and natural gas will have become a reality. By 2025 (maybe even sooner), the American market will only need to import about 30% of its daily requirements. That's down from almost 70% only a few years ago.
Those imports will come primarily from Canada. Other sources will only be utilized if they benefit from cost-side considerations.
As a result, the United States will be left with significant additional production over and above what is needed. So there is no longer any strategic reason to prevent U.S. oil exports.
In fact, there is too much to gain from an employment and tax base perspective, which means the political pressure to allow exports will grow.
As the policy change meets the infrastructure development, a number of companies all along this new value chain will become great targets for investment.
Also, as we begin to see a short-term ceiling forming for oil prices, do not forget these simple facts.
Second, the United States will have plenty of excess oil for some time to come.
Finally, even with the changes taking place in the trading balance, prices (and therefore profits) will be higher in Asia.
All of these conditions will set the stage for the coming U.S. oil export surge. . .and our ability to profit from it.
And don't forget: The Gulf and East Coasts are about to benefit big time from the export of liquefied natural gas (LNG) to Europe and Asia.
It all adds up to be an exciting time for energy investors.