Iran Exports, U.S. Shale Put World Oil Picture In Flux

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An easing of Europe's oil export restrictions on Iran, recovering production in Libya and Iraq, and a political battle to undo long-standing oil export restraints in the U.S. point to a complex year for global oil supplies.

Europe plans to lift its ban on reinsuring tankers out of Iran on Monday, Bloomberg reports, providing that the International Atomic Energy Agency certifies the country's nuclear program has met conditions of the November agreement brokered by the U.S. The six-month easing of restrictions would allow shipping fleets, generally insured through a London-based claims-sharing pool, to insure tankers headed for India, China, Japan, South Korea, Turkey and Taiwan.

European companies are still prevented from buying Iranian oil, reports said, and Iran's exports remain capped at 1 million barrels per day by rules of the November pact.

The change is one piece in a rapidly shifting global supply puzzle. While many countries, including Venezuela, Libya, Iraq and Mexico, have struggled to maintain oil production, the U.S. explosion of cheap crude for the past five years from areas like the Bakken and Eagle Ford has led to whatContinental Resources ( CLR ) CEO Harold Hamm called an American energy renaissance.

Crude Export Restrictions

Domestic crude oil production rose 15% in 2013. It is projected to rise 13% this year, well ahead of recovering demand growth, to 8.5 million barrels per day. Smaller, U.S.-focused firms such as Continental,Sanchez Energy ( SN ),Goodrich Petroleum ( GDP ) andDevon Energy ( DVN ) have played key roles in opening up those resources and underwriting that boom, which is altering the calculus of the global energy trade.

"As we go into the new year and export more oil, the U.S. is really going to be ground zero in the global energy marketplace," said Phil Flynn, an analyst at the Price Group. "We will have a major say in the marketplace."

But U.S. producers can only export limited amounts of crude due to federal regulations enacted just after the Arab members of the Organization of Petroleum Exporting Countries embargoed their oil exports to the U.S. in 1973.

Under the ban, no U.S. oil can be shipped abroad, but there are some loopholes. Oil from Alaska's Cook Inlet, oil that flows through the Trans-Alaska Pipeline and oil shipped to Canada are allowed. Refiners are allowed to ship gasoline and diesel abroad.

Oil companies likeConocoPhillips ( COP ) and some members of Congress, including Sen. Robert Menendez, D-N.J., and Sen. Lisa Murkowski, R-Alaska, argue that the export ban is doing more harm than good for domestic drillers.

"The world needs the crude," Conoco CEO Ryan Lance said in November.

Refiners such asMarathon Oil (MRO),Valero Energy (VLO) andHollyFrontier (HFC) have benefited from the discount of light crude in the U.S., sending refined products abroad at much higher prices. An odd chorus of environmentalists and refineries like Valero has joined in attempts to discourage any removal of the ban.

"The same arguments that people use against the Keystone pipeline, they will use against exporting crude," said Allen Good, senior analyst at Morningstar.

He believes there is a zero percent chance the ban will be lifted this year as it's an election year. But he says it is a positive sign that politicians like Ernest Moniz, President Obama's energy secretary, are open to the idea and revisiting the ban.

Flynn is more hopeful about the ban's reversal.

"When we look at energy, we are in a new era," Flynn said. "We can't be going around living in a 1970s mentality when it comes to U.S. energy-exporting policy."

Production Outpaces Demand

U.S. demand for oil slumped in 2012 to the lowest level since 1996 as a weak economy sidelined the cars, trucks, trains and industries that normally demand fuel.

The U.S. economy has now expanded for 10 straight quarters, boosting oil demand by about 380,000 barrels per day in 2013, according to the Energy Information Administration. This year, the EIA expects U.S. liquid fuels consumption to edge up 0.1% to an average 18.88 million barrels per day. That is well below the 2005 peak of 20.8 million barrels, partly due to the influence of hybrid vehicles, higher mileage cars and fleet vehicles shifting to natural gas.

Globally, liquid fuels consumption last year rose 1.2 million barrels per day to 91 million barrels -- well above the pre-recession peak of 85.1 million barrels. The EIA expects another 1.2 million bpd gain in 2014.

U.S. demand for oil is expected to outstrip Chinese demand growth for the first time since the 1990s, according to a Dec. 6 report by Goldman Sachs. Demand for oil is also strong in other developed nations, with demand from Europe's struggling economies also expanding last quarter.

But emerging-market demand was disappointing, according to Goldman, and will continue to disappoint in the coming years. Analysts are expecting developed-market demand to continue driving the market this year and in 2015.

A New Largest Oil Producer

The hottest rising production areas in the U.S. are shale formations: the Bakken in the Dakotas, the Eagle Ford in South Texas and the Permian Basin in West Texas, according to James Williams, an energy economist with WTRG.

So producers with strong footholds in those regions like Goodrich, Devon, Sanchez,Whiting Petroleum (WLL) and others will continue to perform well in 2014, Williams says, as will oilfield service providers led byHalliburton (HAL) andBaker Hughes (BHI).

U.S. oil prices, gauged by the West Texas Intermediate benchmark, are 10% below a November peak, 10% above an April low and hovering near $94 a barrel -- the midpoint in their trading range over the past three years. Brent crude -- the European benchmark generally used as a standard outside the U.S. -- is also near the middle of its three-year range, trading about $12 above U.S. prices.

Rising U.S. production, which the International Energy Agency says will drive the U.S. past Russia to become the world's largest oil producer by 2015, keeps downward pressure on those prices. But Williams emphasizes that OPEC remains a major player with regard to global prices.

OPEC Still Very Relevant

Its 12 member countries now produce 40% of the world's oil. The group voted at a December meeting in Vienna to hold production levels steady at 30 million barrels per day. The group in the past has said it aims to hold its reference prices in the $90 to $100 per barrel range.

The consortium saw prices paid for its "reference basket" collection of crude fall 3% in 2013, breaking three years of increases. The group said demand for its oil decreased by a half-million barrels per day during the year, and forecasts another 400,000-barrel decline this year to about 29.5 million barrels per day.

This hints at a possible quota cut at the next planned meeting, in June. Such a move would, under normal circumstances, push up the price of Brent crude and, to a lesser degree, the more insulated WTI benchmark.

"If OPEC production cuts back, U.S. producers should see profits rise," Morningstar's Good said. "But you wouldn't see the benefit international producers would."

Rising output and exports from Iraq, Iran and Libya are wild cards that could put meaningful downward pressure on oil prices, analysts say.

In December, Bloomberg reported that Iranian Oil Minister Bijan Namdar Zanganeh claimed the country planned to increase production to 4 million barrels per day after sanctions were lifted -- a 50% increase over estimated current levels -- "even if it goes to $20 a barrel."

The White House last week worked to discourage a deal being discussed between Russia and Iran in which Iran would export up to 500,000 barrels a day in exchange for Russian equipment and goods, according to Reuters. Such a swap could potentially trigger U.S. sanctions, a National Security Council spokeswoman said.

The move would, according to the Christian Science Monitor, raise Iran's current oil exports by half and pour $1.5 billion into its economy each month.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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