The 'other side' of North American energy independence

I expect light oil prices across all of North America to fall in Q3 2013.  That’s when fast growing domestic shale oil production out of North Dakota, West Texas and even Canada will replace more expensive, Brent-priced imports in the Gulf Coast Refinery Complex (GCRC).

Granted, some analysts say it will be later, but the End Game is the same—lower oil prices, which could act as a drag on oil stocks later this year.

The rise in US oil production is now a well-known fact—about 800,000 barrels a day increase in 2012, and analysts are expecting at least another 1,000,000 bopd over the coming two years.

The relief valve for light oil prices has been replacing imports at the GCRC, which holds half of all US refinery capacity. But sometime in Q3 or Q4 this year, ALL light oil imports should stop coming into the GCRC. The last tanker will come and go.

That will bring huge celebrations, as it's a big milestone towards energy independence.

But it also means that light oil producers are now hostage to domestic light oil refineries.

You see, there are a couple other factors at work here. One is that it is illegal to export crude in the US (though some is getting out the back door into Canada and out the east coast).

Second—as I’ve said many times before, there are almost no east-west pipelines in the US—all the pipelines lead to the GCRC. The US can’t even ship their own oil around to east or west coast refineries, because the Jones Act doesn’t allow that to happen except on ships that fly a US flag and have US crews.

To save money, almost all ships (and it likely is ALL) have African or Latin American flags and crews. So all that light oil is stuck there in the GCRC.

Third, about 500,000 bopd of light oil refinery capacity in the US has been lost to heavy oil in the last few years, for both technical and economic reasons:
1.    Most of the world’s oil was getting heavier prior to the Shale Revolution.
2.    Heavy oil now has such a deep discount, it’s much more profitable for refineries.
Of course this trend doesn't sit well with light oil producers. But it's great news for the refinery sector – and one company, specifically.

In fact this company is enjoying record growth, and recently gave me the biggest dividend payout of my investing career.

And it's highly likely that management will announce another record quarter (Q4) – the basis for another huge cash distribution for shareholders on record.

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  • Why this play is working like gangbusters (and – if my thesis is correct – should continue for a long time – as in, years.)
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