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The oil world turned upside down--the U.S. exports refined oil products to Mexico and Brazil
12/16/2011 8:30 am EST
Pick yourself up off the floor. It’s true—at least by one definition of “oil.” And the change will have major effects on U.S. economic growth and on what you should hold in your portfolio.
Let’s start by nailing down exactly what I mean by oil.
The U.S. is not about to become a net exporter of crude.
In September the United States exported a whopping 35,000 barrels a day of unrefined crude oil. That same month the U.S. imported 9 million barrels of crude oil a day. If you look just at crude, the U.S. is the same huge importer of oil that it’s been for as long as most of us can remember.
But if you look at the figures for refined petroleum products, the picture is shockingly different. In September the United States exported 3.2 million barrels of refined petroleum products a day and imported just 2.2 million barrels a day. That’s roughly a surplus of exports over imports of a million barrels a day. For the first nine months of 2011, according to the U.S. Energy Information Agency, the U.S. exported 752 million barrels of refined petroleum products—gasoline, jet fuel, kerosene, and such chemical industry feed stocks as ethylene, butane, and propylene.
The swing in less than a decade is immense. In 2005, for example, the U.S. imported 900 million barrels of refined petroleum products more than it exported.
This huge shift doesn’t have just one cause.
Part of it is due to the oil boom in the United States as a result of new technologies. The production of oil from oil shales has turned North Dakota into a major domestic oil producer with production going to 424,000 barrels a day in July 2011 from 98,000 barrels a day in 2005. Oil from oil shales has also reversed what looked like the inevitable production declines for older fields in states such as Texas. Oil production there had tumbled from 2.6 million barrels a day in 1980 to 1.9 million in 1989 to 1.087 in 2008. But instead of continuing its march toward zero, oil production in Texas edged upwards in 2009 to 1.106 million barrels a day and to 1.169 million in 2010. That’s given U.S. refineries a lot of domestic crude to work with.
Part of it is a result of the very slow economic recovery in the United States. U.S. gasoline consumption peaked in 2007. In August 2011, a top driving month, U.S. consumers used almost 8% less gas than they did four years earlier. In contrast gasoline consumption has continued to climb in faster growing emerging economies. Gasoline consumption in India, for example, was 5.4% higher in October 2011 than a year earlier.
Part of it is a result of a shortage of refinery capacity in some parts of the world and for some kinds of products. For example, while Mexico, one of the world’s big oil producers, doesn’t import any crude from the United States, it does import a growing volume of refined petroleum products. Mexican imports of gasoline climbed by almost 70% from 2005 to 2010. Brazil, which also doesn’t import any crude oil or any gasoline from the United States, has still seen imports of refined petroleum products from the United States grow by 220% from 2005 to 2010. The biggest jump has been in distillate fuel oil.
And, finally, part of it is geography. The economies of Latin America are seeing some of the fastest rates of growth in consumption of petroleum products—and the Gulf Coast refineries are perfectly placed to export to those countries. Besides Mexico and Brazil, Argentina and Peru have recently become net importers of petroleum products from the United States.
I can see two big effects from this shift to refined oil products exporter by the United States.
First, the shift damps, to some degree, the impact of higher oil prices on the U.S. economy. There’s no evidence to suggest that U.S. consumers have gotten any benefit from the United States becoming an exporter of refined oil products. Gasoline prices, as far as anyone can tell, haven’t fallen as a result, for example. Higher oil prices are still likely to take money out of consumers’ wallets that could have been spent on things other than gasoline.
But the shift does mean that more oil profits go to the U.S. economy as a whole. The U.S. trade balance with the rest of the world looks better as a result of this shift and that’s reassuring to overseas investors at a time when they have every right to be nervous about the amounts that the United States owes to the rest of the world. A United States that’s a net refined products exporter too is putting fewer U.S. dollars into circulation in the world at a time when overseas holders of dollars are wondering how many more greenbacks they want to stuff into their investment portfolios. That, like the improvement in the trade balance, helps to strengthen the U.S. dollar. Maybe only marginally, but at a time like this every change at the margin helps. A stronger dollar and a slightly smaller trade deficit lead to slightly lower U.S. interest rates and that’s a boost to U.S. growth. (All this, of course, is overwhelmed right now by the effects of the euro debt crisis, which is by far the strongest force pushing up the U.S. dollar and pushing down U.S. interest rates.)
Second, the shift to net oil products exports means these are better times for U.S. oil refiners. Especially those that are located in the right place to take advantage of the geography of the U.S. oil boom and that are positioned at the right point in the refinery product line.
So, for example, HollyFrontier (HFC) operates three of its five refiners—Woods Cross, Utah; Cheyenne, Wyoming; and Artesia, New Mexico—right next door to the oil from shale boom. That location means the company is in the right place capture the current discount on mid-continental oil.
Valero Energy (VLO) has less concentration in that neighborhood but in the most recent quarter its refineries in the Rockies captured a gross margin of $33.05 a barrel
Geography isn’t the only positioning that counts. U.S. refiners like Valero and Marathon Petroleum (MPC) operate technologically complex refineries that are able handle cheaper heavy crudes. The discount for heavy MAYA crude, for example, right now is running at about $8 a barrel. These discounts are likely to widen as the world supply of light, easily refined oil falls and the supply of heavy crudes from Canada’s oil sands increases. Only about 70% of refineries outside the United States have the capacity to upgrade to handle heavier crudes, according to Credit Suisse. That gives U.S. refiners even more upside when the global economy does indeed begin to recover. To meet higher oil demand in a recovering world economy, oil producers will turn to increasingly heavy grades of crude to fill the gap. That’s where the supply is.
In the short run 2012 doesn’t look like the greatest year for U.S. refinery stocks—if only because 2011 was such a great year. Add in the probable effects of a global economic slowdown in Europe and in emerging economies (at least in the first half of 2012) and Wall Street is projecting that earnings per share at most refinery companies will come in below 2011 levels for 2012. In fact the earnings projections look downright grim for 2012. The consensus projection shows earnings per share falling by 37% at HollyFrontier in 2012 from 2011, by 14% at Valero, and by 36% at Marathon Petroleum (MPC).
Do I need to say that on those numbers and on the macro view of the economy and financial markets, I’m not looking to buy these shares now?
Middle of 2012, though, is likely to be another things entirely. As I laid out in my December 13 post http://jubakpicks.com/2011/12/13/oh-joy-it-looks-like-the-first-half-of-2012-will-be-a-continuation-of-the-last-half-of-2011-heres-how-to-navigate-the-uncertainty/ by the middle of 2012 I anticipate that much of the uncertainty will have dissipated and even if the global economy isn’t a picnic, investors will know where they are.
At that point I’d begin looking at the stocks of refiners that are projected to show earnings growth in 2013 from 2012. That would include Valero—where Credit Suisse projects earnings per share will go to $4.94 in 2013 from $3.95 in 2012—and Marathon Petroleum—where Credit Suisse projects earnings of $7.02 a share in 2013 from $5.45 in 2012.
I’m going to add both of these stocks to Jim’s Watch List with this column http://jubakpicks.com/ .
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own of any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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