Shares of oil refining companies, Valero Energy Corporation (VLO - Free Report) and Phillips 66 (PSX - Free Report) suffered a sharp fall in yesterday’s trading session following the ruling by the Obama administration that it was relaxing a four-decade ban on crude oil exports.
Per the ruling, the U.S Department of Commerce cleared the way for the first exports of an ultra-light form of oil known as condensate. However, the same has to be processed in a distillation tower, a type of refining unit. Condensate requires minimal processing as compared to what gasoline and diesel fuel undergo to qualify for export. Refined product exports are a regulatory gray area. According to Wall Street reports, while condensate yield from an oil field cannot be exported, it can be done if the yield is from a natural gas plant or refinery.
The result may be very close to the chemical makeup of oil but it is not defined as raw oil. Many energy companies have avoided export rules by processing light crude, which is plentiful in U.S. shale formations.
The change in government policy will be implemented on export applications by Pioneer Natural Resoucres (PXD - Free Report) and Enterprise Products Partners L.P. (EPD - Free Report) . The latest ruling is likely to encourage applications from other oil companies and redirect some crude away from the Gulf Coast and Western refineries.
Though the the latest development will expectedly have a minimal impact on refineries’ profits, the possibility of a further easing of the export ban has been plaguing the market at large. The refiners are likely to suffer if the new ruling pulls down the barriers to facilitate oil exports altogether, ending a long-standing ban. This would result in a convergence of the U.S. and international oil prices, thus weakening refiner margins. The ruling has already resulted in this convergence, with the prices of U.S. oil rising slightly to $106.50, while the price of Brent crude, the international benchmark on which U.S. gasoline prices are based, dropped 0.4% to $114.00.
The federal government’s decision to ease the oil export ban resulted in a sell-off in refiners’ shares. Valero, which carries a Zacks Rank #2 (Buy), fell 8.3%, while shares of Phillips 66 with a Zacks Rank #3 (Hold) tumbled 4.2%.