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U.S. Easing of Oil Exports Challenges OPEC's Strategy

Source: Boomberg 12/31/2014, Location: North America

The Obama administration’s move to allow exports of ultralight crude that may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc.

A type of crude known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the oil, according to U.S. government guidelines published. That may boost supplies ready to be sold overseas to as much as 1 million barrels a day by the end of 2015, Citigroup analysts led by Ed Morse in New York said in an e-mailed report.

Saudi Arabia led the Organization of Petroleum Exporting Countries to maintain its production quota at a meeting last month even as a shale boom boosted U.S. output to the highest in more than three decades. That prompted speculation OPEC was willing to let prices fall to force some companies with higher drilling costs to stop pumping. “U.S. producers are under the gun to reduce capital expenditures given lower prices,” Citigroup said in the report. “Now an export route provides a new lease on life that can further weaken crude oil markets and throw a monkey wrench into recent Saudi plans to cripple U.S. production.”

Current U.S. export capacity is at about 200,000 barrels a day, which could be expanded to 500,000 a day by the middle of 2015, according to the bank.

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