A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

April 14, 2014

Pump up the volume
US crude oil imports and exports: Mar '04 – Mar '14

chart

Source: Bloomberg, as of 3/31/14. Import data ends 1/31/14, latest available. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line:

  • Seemingly overnight, the US has become one of the world's top three oil producers–something that many energy experts thought impossible just a few years ago.
  • The capper: the US is now also the world’s largest producer of natural gas.
  • Two key results of this shift: oil imports have declined dramatically; and there’s a rising call to change current restrictions which limit crude oil and natural gas exports.
  • A key question in the emerging debate about export policy is whether achieving energy independence and becoming a top energy exporter are goals that can co-exist over time.
  • After all, until the US produces more oil and natural gas than it uses, increasing exports will require an offsetting increase in imports to meet domestic demand.
  • However, some believe that allowing more US oil and gas to flow abroad – where prices are generally higher – will stimulate greater investment in US energy, potentially increasing production and lowering global prices in the long run.
  • The flip side is the concern that until that additional supply stream gets going, prices for US consumers would be higher, since a greater share of supply would come from higher-priced energy imports.
  • How the longer-term balance will be struck remains to be seen; but for now, continued growth in domestic oil and gas output appears likely. And that growth will require ongoing investment in energy-related equipment and infrastructure to extract, process and transport domestic production – whether used at home or sold abroad.

The chart:

  • The chart shows the volume of US crude oil imports and exports over the previous decade.
  • Note that the volume of imports of crude oil is measured in millions of barrels per day. US exports are much lower than the volume of imports; as a result, crude oil exports are measured in thousands of barrels per day.

Context & Perspective:

  • The US presently ranks behind Saudi Arabia and Russia in terms of crude oil production, but some forecasts suggest it could surpass them both sometime in 2015.
  • The volume of US oil and gas exports is relatively small because most of America’s energy production is consumed domestically, the result of restrictions on exports–rooted in the oil shocks of the early 1970s.
  • At present, exports of refined crude oil products like gasoline and diesel are permitted, but condensate and unrefined crude are mostly not. The exemptions for some of the oil produced in Alaska–the vast majority of the small amount of these exports–apply to crude shipments to nearby Canada.
  • Natural gas is also subject to restrictions: US exports it to Canada and Mexico via pipeline, but the Department of Energy must grant special approval for any exports to countries that have not signed a free trade agreement with the US. It has only done so once; however, there are 31 requests now pending.
  • Few expect the 40-year ban on crude exports to be lifted anytime soon, but some easing of export restrictions on liquefied natural gas (LNG) could occur sooner, if geopolitics is used as a lever to lift the restrictions. One angle: Ukraine’s dependence on Russian natural gas complicates efforts to strengthen economic ties with the European Union – LNG exports to Ukraine could lessen Russia’s influence in the long run.
  • Of course, increasing exports would require changes to America’s refining structure, which was developed to process imports of heavier international crude–not the lighter West Texas Intermediate crude produced domestically. In addition, expanded export facilities and related equipment will be needed to transport liquefied natural gas in greater quantity abroad.
  • Yet, even if exports do not increase significantly, infrastructure expansion and upgrading will still be needed to handle increasing domestic production.

Definitions:

Condensate comprises petroleum products such as naphtha and other relatively light hydrocarbons which remain liquid at normal temperature and pressure. Recovered mainly from gas reservoirs, condensates are very similar to light stabilized crude oil and are used as feedstock for oil refining and other petrochemical industries.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.


The opinions and views expressed herein, as well as references to individual companies or securities, are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or recommendations to buy, hold or sell, or investment advice.

Past performance is not a guarantee of future results.

All investments involve risk, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Commodities contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland:  
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:  
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.  

Qualified domestic institutional investors in the People's Republic of China (PRC), Distributors and existing investors in Korea and Distributors in Taiwan:  

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in the PRC and Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in the PRC, Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which may include Legg Mason International - Americas Offshore. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Canada:  
This material is provided by Legg Mason Canada Inc. Address: 220 Bay Street, 4th Floor, Toronto, ON M5J 2W4. Legg Mason Canada Inc. is affiliated with the Legg Mason companies mentioned above through common control and ownership by Legg Mason, Inc.

All Investors in Australia:  
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.

FN1411354

Previous Editions

Click on a date to view that week's edition of charts.

Poll

Go for growth: Where will a global recovery be strongest this year?








Poll

Go for growth: Where will a global recovery be strongest this year?

Europe, as countries emerge from bailouts
(39%)
US, as consumers regain optimism
(41%)
Japan, as stimulus programs begin to bear fruit
(9%)
China, as reform and pro-growth policies continue
(11%)



Previous month Poll

Expect the unexpected:
Which of these outcomes
do you think is the most likely
in the coming year?

US: economic surge spurs Fed to begin raising interest rates
(27%)
Japan: return to recession despite Abe's continued aggressive stimulus policies
(12%)
China: negotiate with neighbors over its territorial claims in the South China Sea
(5%)
Europe: Italy forms a government that lasts the entire year
(14%)
None of the above; business as usual worldwide
(42%)