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US Exports of Finished Petroleum Products Near All-Time High

By Peter Staas on Nov. 13, 2013
US Refined Product Exports -- SMALL

The US shale oil and gas revolution continues to drive major changes in the domestic energy market, creating profitable opportunities at every stage in the value chain.

Robust production from these unconventional plays in 2010 enabled the US to overtake Russia as the world’s leading producer of natural gas. Meanwhile, surging output of crude oil and natural gas liquids (NGL) recently prompted the International Energy Agency to forecast that the US could also supplant Russia as the world’s No. 2 producer of liquid hydrocarbons.

As we highlighted in Profiting from Midstream Capacity Constraints, rapidly growing production of NGLs, crude oil and natural gas has created ample opportunity for master limited partnerships (MLP) to build pipelines and processing capacity to meet this output growth.

But in recent earnings calls, Enterprise Products Partners LP’s (NYSE: EPD) management team has highlighted the emerging opportunity set further downstream, on the demand side of the equation.

With the US market fundamentally long NGLs, natural gas and light-sweet crude oil, the widening price spread between domestic and international markets for these hydrocarbons has created a huge arbitrage opportunity.

In previous installments of Graph of the Week and Energy Investing Weekly, we’ve discussed the push for US natural-gas exports and the less-appreciated but more immediate uptick in exports of propane and butane.

What about crude-oil exports?

US law prohibits the export of crude oil without a special license from the US Dept of Commerce, which must find that these shipments are “in the national interest.”

To date, approvals have only allowed limited shipments to Canada; unless the law changes or regulators start to authorize more export licenses, the emerging glut of crude oil on the Gulf Coast (a trend we spotlighted in Crude Realities: Price Volatility is Here to Stay) will persist.

However, US exports of refined products have soared in recent years, increasing at an average annual rate of 9.7 percent since 2010.


Source: Energy Information Administration, Energy & Income Advisor

About 30 percent of the vessels carrying these products are destined for Western Europe, while Central America and South America are other popular destinations.

Growing US exports of refined products reflect a confluence of several factors.

For one domestic demand for gasoline, diesel and other fuels has continued to shrink over the past decade.

Meanwhile, the US refinery complex has been running at elevated utilization rates in recent years, as downstream operators seek to take advantage of the nation’s abundance of inexpensive light-sweet crude oil and elevated prices for refined products that track supply and demand conditions in the global oil market.


Source: Energy Information Administration, Energy & Income Advisor

Greg Garland, CEO of downstream operator Phillips 66 (NYSE: PSX), spotlighted these developments during the company’s third-quarter earnings call:

As US demand for refined products declines, we believe that increasing export capability is going to be important to keep our refineries running at high utilization rates. We have seven coastal refineries in the U.S. We currently have 340,000 barrels a day of export capability, and we plan on growing this to 500,000 barrels a day over the next several years. Our exports increased again this past quarter. During the third quarter, we exported 190,000 barrels a day. That’s the fourth consecutive quarterly increase in exports for us.

How can investors profit from these trends? Our favorite growth-oriented MLP has amassed significant storage and terminal capacity on the Gulf Coast and already profits from growing exports of refined products, propane and butane.

And even if lawmakers don’t loosen restrictions on exports of domestically produced crude oils, demand for storage and shipping capacity on the Gulf Coast ensures that this MLP has ample room to grow its cash flow and quarterly distribution.

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