This Report Is Shaking Up The Energy Industry…
There’s a fierce debate heating up between oil market bulls and bears.
Bears think the ongoing US oil boom will bring the price of West Texas Intermediate Crude (WTIC) dramatically lower in 2013 and beyond. After all, US field production is growing like crazy.
Take a look…
As you can see from this US Energy Information Administration (EIA) chart, US crude production is clearly surging. In fact, production for the third week of December 2012 came in at just under 6.9 million barrels per day… the highest monthly rate in over 15 years.
And according to the bears, vigorous production isn’t the only bearish factor for WTIC…
The EIA published a very interesting report December 19th on booming US production and its impact on global energy markets. The government agency says that with crude production thriving, the US will be the world’s number one oil producer in the not-so-distant future.
Sound like a stretch?
It does to me too…
However, the EIA is only restating what the International Energy Agency (IEA) proposed in November 2012. According to the Paris based organization, recently unlocked energy reservoirs will have the US surpassing Saudi Arabian production by 2020.
In fact, the IEA estimates the US will pump 11.1 million barrels of oil per day in 2020, about 500,000 barrels per day more than the Saudis.
Surging US production and optimistic IEA estimations are oil market bears primary proof point. The price of crude certainly has to come down since the US will be swimming in oil in 2013 and beyond… right?
Hold on a second…
A closer look at the data reveals some interesting facts.
Even though production is currently hitting a high note, the US is still importing massive quantities of crude. As a matter of fact, 8 million barrels per day were imported in October.
Where did that crude come from?
Nearly half of it came from OPEC. That’s right, our wonderful “friends” across the pond supplied us with nearly 4 million barrels per day in November. The rest came from non-OPEC sources including Canada and Mexico.
Here’s the key….
As long as OPEC is supplying the US with crude, WTIC prices are going to stay firm. You see, OPEC member countries (like Saudi Arabia) have a knack for keeping crude prices at levels benefitting their bottom line.
When crude prices weaken, OPEC cuts production. When production falls, prices go up.
It’s not rocket science.
And even when the US supposedly surpasses Saudi Arabian production in coming years, oil prices still aren’t going to collapse like bears expect.
You see, even though the US will surely be producing more in coming years, net US oil inventories will likely be close to where they are now.
Why?
The US won’t be importing nearly as much oil from OPEC. That means the oil we’re importing from them now will no longer be a part of the total US inventory equation. Of course, such a scenario would be great for the US economy, as we wouldn’t be sending billions of dollars to OPEC every month.
But it won’t necessarily result in dramatically lower crude prices because OPEC will simply find new buyers for their product (like China). As a result, the global supply/demand balance will remain roughly the same as it is now.
And remember…
Getting oil out of newfound US reservoirs like the Bakken is extremely expensive for oil companies. In fact, the estimated average breakeven price for oil producers in the Bakken is $80-$90 a barrel. If crude prices were to drop into the $60-$70 a barrel range you can be assured companies will curtail production, sending prices right back up.
So what’s all this information mean for energy investors?
As long as the US doesn’t enter a recession in 2013 (which I don’t believe it will), WTIC prices will likely stay well above $80 a barrel. And that means it will remain a profitable venture for investors to ‘buy the dips’ in crude.
You can do that with ETFs like the United States Oil Fund (USO).
Until Next Time,
Justin Bennett
Category: Commodities
