Fund managers are beginning to size up the US oil and gas industry and revise their portfolios as the debate heats up about lifting the ban on US crude oil exports.
The US imposed the ban after the Arab oil embargo of the early 1970s, keeping supplies to itself for domestic consumption and industrial use.
But a surge in domestic production of crude oil in recent months has prompted growing pressure on politicians to lift the ban.
Earlier this month, President Barack Obama’s former economic adviser Larry Summers – previously Secretary of the Treasury under Bill Clinton – gave the proposal his unconditional endorsement.
At the moment, US companies are permitted to export oil, provided it has been refined – although with the recent weakening of restraints, the oil can now be lightly refined.
Some fund managers say ending the ban on crude would drastically change the dynamics of the US oil and gas industry and are readying their portfolios for such an environment.
Robert Royle, manager of Smith & Williamson’s £85m North American Trust, is considering increasing his allocation to oil and gas as a result.
Mr Royle had been underweight in oil equipment and hardware, holding 2.4 per cent less in his portfolio than peers in the IMA North America sector. He is also underweight ExxonMobil, the American oil and gas corporation. It is his second-highest underweight, holding 2.5 per cent less than the sector average.
Mr Royle said that allowing the exportation of crude oil would hurt American refiners, who currently buy crude at a low price and sell the petrol they produce at a high price.
At the same time, American oil companies would benefit as they would be able to sell crude to the highest bidder.
“Fund managers in this area need to look at turning over rocks,” Mr Royle added.
“The oil and refinery sector is one that could be set for change, so that is one area we are looking at closely.”
Mr Royle’s fund has returned 6 per cent in the past year, compared with 10.9 per cent for the FTSE World USA index, according to the fund’s factsheet.
Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management, said he thought the area was a difficult one to play.
“It is not clear which politicians are supporting and which are opposing the exporting of crude oil,” he said.
“There is unlikely to be any decision for a while. I think fund managers are best off playing the oil service providers and leaving it at that. The outcome is too difficult to predict.”
Hugh Grieves, co-manager of the £70m CF Miton US Opportunities fund, said the decision will certainly be made and that it will happen either in 2015 or 2016.
“The choice is either the US begins pouring oil into the ocean, turns off the taps or starts exporting,” he said.
Opponents argue that lifting the ban will reduce the supply in the States and cause domestic petrol prices to go up. Mr Grieves thinks that the overproduction will more than compensate and that prices will go down.
Abdalla Salem El-Badri, secretary general of the Organisation of the Petroleum Exporting Countries (OPEC), announced on September 16 that OPEC’s quota of barrels produced per day could fall by 500,000 to 29.5 million barrels next year.
Mr Grieves said: “This will be good for US producers, the US economy and the dollar, but bad for Middle East and North African markets.”
Like Mr Chillingworth, he thinks the best option is to play the oil service providers.
“There is a lot up in the air, but the opportunities that are continuing are in US domestic growth and production,” Mr Grieves added.
“I am increasing our allocation to Halliburton, a leader in providing fracking horsepower, and Kansas City Southern – a railroad that transports the sand that needs to be pumped [as part of the fracking process] and also transports the crude out.”
Summers speaks out
One of its foremost proponents of lifting the ban on crude oil exports has been Larry Summers, US Secretary of the Treasury from 1999-2001 and economic adviser to Barack Obama in the early years of his presidency.
The original reason for the policy being enacted in the 1970s was to reduce the US’s vulnerability to oil price spikes, Mr Summers has said. However, he now claims there is “no reason for believing that it is functional on a continuing basis today”.
He has also pointed out that the US insists on free trade and that, given how quickly the production of oil has grown in the US in recent years, companies will be increasingly keen to export it internationally.
According to the US Energy Information Administration, more than 9.6 million barrels per day were produced in 1970, but this steadily declined to 5 million a day in 2008. Production has since increased and with the success of fracking in the US, the amount of oil the country produces is set to rise. Production last year stood at 7.4 million barrels.
A big concern among US politicians is the price. No senator or member of Congress wants to break the news to their constituents of higher gasoline prices.
However, Mr Summers has said that, according to research, prices would be lower – between two and 12 cents per gallon lower – if the ban were lifted.
In a speech to the Washington-based Brookings Institution think tank this month, he said the question of having a “substantially more permissive policy” in terms of crude oil exports was “easy”.
“The answer is affirmative,” he went on...
“The merits are as clear as the merits with respect to any significant public policy issue that I have ever encountered– and it is an important test of the efficacy and functioning of our democracy whether within the next nine months we will get to that correct solution.”
