Crude Carnage Resumes: WTI $52 Handle - New Cycle Lows, Here's Why

Just 3 short days ago, energy stocks were surging and oil was - according to the mainstream media - "stabilizing." Today, we plumb new cycle lows, with WTI back below $53 as every rally is to be sold for now... While no one can resist the temptation to call the bottom in oil, the recoupling of oil-dependent energy stocks from oil appears to the no-brainer trade of January...


Not Zee Stabilitee...

As to what is poressuring crude - apart from over-supply in a dwindling demand world - 3 possibilities today:

1) News about the Saudi king's hospitalization (though it is unclear - apart from volatility - why this is bad for oil prices);


2) Zee Europeans have said lower oil prices bring ECB QE closer (not transitory like Janet said) and so there is a market pressure to force oil prices lower to force Mario's hand; and


3) The US appears to opening the door - albeit gently - to more exports (thus foiling OPEC's strategy of forcing US Shale to cut production as the export route enables their supply - albeit at lower prices - to get to market)

Here is Citi on the "US Condensates" news... Alert: US Government Makes Blanket Clarification; Could Result in up to 1-m b/d of Processed Condensate Exports by end 2015

In a not-so well-hidden set of FAQs (Frequently Asked Questions) the Commerce Department went a long-way to make public what had previously been private decisions clarifying what constitutes processed condensate, enabling producers to convert field condensate (not generally permissible for free export) into processed condensate, which is generally freely exportable as petroleum product.

While government officials have gone out of their way to indicate there is no change in policy, in practice this long-awaited move can open up the floodgates to substantial increases in exports by end 2015. In late June there was wide publicity surrounding clarifications granted to two companies, Pioneer Natural Resources and Enterprise Products Partners, to the effect that lease condensate processed through a stabilization unit and elementary distillation tower is re-constituted and freely exportable. Now Commerce, through FAQ’s issued today, has made public specific criteria that allow condensate to be exported, ending the risk that companies would have to take if they self-certified that their exports constituted products rather than crude oil. Regulatory clarity should bring more exports.

The US shale revolution has been based on light and ultra-light crude oil, with total production of 40+ API crude oil currently some 3.81-m b/d. Of this around 640-k b/d is lighter than 50 degrees API. Eagle Ford production alone is at least 340-k b/d of crude lighter than 50 degrees API but production growth has been largely in crude gravity between 40 and 50 degrees, which is currently 42% of Eagle Ford Production, or at least 430-k b/d.

Citi estimates that currently there is about 200-k b/d of export capacity (including dedicated tanks and docking space), but this could be expanded to 500-k b/d by mid-year and 1-m b/d by the end of 2015.


The timing of the new FAQs is exquisite. US producers are under the gun to reduce capital expenditures given lower prices. One critical factor impacting production economics, especially in the Eagle Ford, is the exportability of ultralight crude oil. 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 US production.

Another FAQ clarifies what makes it possible to re-export Canadian crude oil, making clear that minimal co-mingling with US crude is acceptable. Beyond this, blending Canadian crude or Mexican Mayan with processed condensate spells competition for Middle East producers and Russia in European and other markets. It is almost certainly the case that today’s clarification was not meant to be a change in policy, but others in the market may well come to a different conclusion.

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But we suspect the Yellen magic can't fix earnings downgrades?


Charts: Bloomberg