12/23/15   Exporting Crude

Editor’s Corner

Ron Rowland

I do not know about you, but I am old enough to remember when OPEC decided to embargo all oil exports to the United States. It was October 1973, and our nation was very much dependent on foreign oil at that time. The embargo had a detrimental effect on our country. Prices jumped sharply, rationing was instituted, and long lines at the pump became commonplace.

The following month, President Nixon signed the Emergency Petroleum Allocation Act, and in December, OPEC doubled its posted price of crude oil (again). It was a tough time for the U.S. and its citizens, but we had a secret weapon. Whether or not you are a fan of Henry Kissinger, it’s hard to argue against his status as one of our country’s top diplomats and negotiators. Two months after Mr. Kissinger presented our “Project Independence” plan to the world, the OPEC ministers announced the end of the embargo.

As part of these events in 1973 and 1974, the U.S. banned exports of domestically produced crude oil. It seemed to be a logical and prudent step to take, and until recently, the ban was mostly forgotten about.

I don’t know what was at the heart of the U.S. energy independence plan and its timeline, or how realistic those 40-year-old projections were. Furthermore, it doesn’t really matter. Just a few years ago, the idea of the U.S. supplying all of its own energy needs was still considered a futuristic dream, and no one had a realistic timeline. Then along came hydraulic fracturing (“fracking”) as a means to extract oil from formations that were previously uneconomical.

Despite its apparent newness, hydraulic fracturing has been around since 1947 and was placed into commercial operation in 1950. It has been used to extract oil from shale formations since 1965, but it grew exponentially once the process was shown to be capable of extracting natural gas from vertical wells.

U.S. energy production ended its decades-long decline and began to climb again around 2005. Last year, the U.S. became the world’s largest producer of petroleum products, a status deemed unthinkable just five to ten years ago. However, this success comes at a price. That price is cheaper oil, cheaper natural gas, and a supply glut of both.

Lower prices and abundant supplies don’t seem to be a problem, unless you work in the oil and gas industry. Prices have not only been falling, but plunging. Supply is plentiful, and storage facilities are at or near capacity. Now would seem like a good time to lift the decades-old ban on U.S. oil exports, and that is exactly what happened last Friday.

The downward pressure on oil prices and energy-related stocks is showing some relief this week. It’s not clear how much of an impact U.S. energy exports will have on the world energy stage at this time. This is a significant event though, perhaps an important catalyst, and late 2015 will be noted on many “historical” oil charts produced in future years. However, I don’t foresee the U.S. becoming a member of OPEC anytime soon.

Investor Heat Map:12/23/15


Yield is once again important to investors, as the three highest-yielding sectors take over the top of the rankings. Consumer Staples is at the pinnacle for a second week, Real Estate has climbed another notch higher to second place, and Utilities jumped six spots higher to land in third. The strength of yield over growth is a sign of investor nervousness, and growth is certainly taking a back seat at this juncture. Utilities, Health Care, and Telecom moved from red to green, and no sectors slipped back into a negative trend. Sectors losing momentum this past week were Technology, Consumer Discretionary, Materials, and Energy. Despite its previously oversold condition, Energy managed to get even weaker since our last update. Perhaps the legislative boost and resulting rally of the past two days will mark the bottom for this cycle, but only time will tell.


The style rankings remain in a defensive posture. Mega-Cap is at the top for a thirteenth week and is now the only style category in the green. The next five positions, consisting of Large-Cap and Mid-Cap categories, are in the same order as a week ago, but Large-Cap Growth has now dipped slightly into negative momentum territory. There were some position changes in the lower tier, but with such tight compression in the momentum scores, we wouldn’t read too much into these at this time. The changes included Mid-Cap Value falling four places to the bottom and Micro-Cap climbing three steps out of the basement.


There are numerous changes in the ranking order among the global categories this week, although they all remain in the red. China jumped three spots to grab first-place honors and knock the U.S. down to third. Japan maintained its second-place spot as the Japanese government explores additional stimulus efforts, including buying ETFs. Pacific ex-Japan was a big upside mover, slicing its momentum deficit by more than half and jumping from seventh to fourth. World Equity and the Eurozone both slid two places lower but kept themselves out of the deep trouble evident in the lowest four categories. Emerging Markets moved ahead of the U.K. on strength from China. Meanwhile, Latin America fell back into last place once again, giving Canada another reprieve.

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“Some estimates say it could create as many as one million jobs when all is said and done.”

-Speaker of the House Paul Ryan on lifting the oil export ban


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