Scraping the Bottom of the Oil Barrel

On Wednesday, Saudi Energy Minister Khalid al-Falih met with his Russian counterpart, Alexander Novak. They pledged to do "whatever it takes" to support oil prices.

In response, oil prices traded lower. Hmm.

Oil has been acting pretty wishy-washy this year. The good news is, there are still plenty of ways to make money as oil scrapes the bottom of the barrel.

For one thing, the bearishness is so extreme you can practically see the claw marks on Wall Street.

How do we know that? Because of how the market treats what should be good news.

It’s not just this week’s meeting. Last week, OPEC and other producers (including Russia) agreed to extend production cuts of 1.8 million barrels per day (bpd) until the end of March 2018.

That sounds bullish, right? Well …

After that happened, oil prices fell to a three-week low.

When what should be good news sends the market lower, it puts investors in a bearish mood.

The good news for bulls is I think we’re about to see the floor at the bottom of the oil barrel.

Let’s start with the fact that the OPEC cuts will probably work to rebalance the market. According to UBS, global oil inventories should draw down sharply through the end of the year.

So this should support the oil price.

U.S. producers — who aren’t restrained by the OPEC agreement — are taking advantage of this situation. U.S. oil production is on track to hit 9.9 million bpd this year, up from 9.32 million bpd recently. That’s according to the U.S. Energy Administration.

That’s why total North American rigs are above 1,000 for the first time since May 9, 2015.

Source: Bloomberg/Baker Hughes

The Permian, Haynesville, Eagle Ford and Mid-Continent shale plays have accounted for more than 90% of rig additions this year. There are companies focusing on those basins that could see their share prices ignite.

According to Barclays, U.S. exploration-and-production companies are poised to increase spending this year by 25%. That’s good for oil services and drilling companies.

You can find those companies in ETFs including the VanEck Vectors Oil Services ETF (OIH). And the SPDR S&P Oil & Gas Exploration and Production ETF (XOP).

Both those ETFs just hit a 52-week low this week. And it’s happening even as oil-services companies including Halliburton, Weatherford International and Schlumberger are raising the rates they charge.

The U.S. exported 527K bpd in 2016. In 2017, some say U.S. crude exports could surge to 800K bpd.

Once that oil is pumped, it will have to be transported. That’s more business for the pipeline companies included in the Alerian MLP ETF (AMLP). That’s also trading near a 52-week low.

So why are investors so bearish? That’s because they aren’t buying the oil-recovery story. They think oil prices are headed lower.

I think they’re wrong. I think bearish investors about to scrape the bottom of the barrel the hard way.

In fact, I think oil prices will swing in the same $43 to $54 range they’ve been contained in since late last year. At least until something comes along to change the market.

And here’s the funny thing …

The "breakeven" price for many U.S. shale producers is getting lower and lower. That’s due in large part to the fact that the oil-services companies are getting much more-efficient at their jobs.

Here’s a chart from Goldman Sachs on how breakeven costs will fall in major U.S. oil basins by 2020.

As a result, Goldman Sachs says U.S. oil output growth potential is strong. In fact, if prices surprise everybody and stay around $55, Goldman says we could see the U.S. add nearly 1 million bpd of new oil production by 2018, and 1.4 million bpd by 2020.

So what are we going to do with all that oil? Export it!

The U.S. was once the world’s biggest net oil importer. Now, China wears that questionable crown.

Instead, the U.S. has become a leading net exporter — with gross exports reaching 2.8 million bpd in 2016. That’s up from 0.7 million bpd in 2004.

Gasoil/diesel is the largest U.S. export product, accounting for 38% of total exports.

And that brings up another winner from this new energy future: refiners.

Or at least those located along America’s Gulf Coast, who can easily turn shale oil into exports. You’ll find the best ones in the VanEck Vectors Oil Refiners ETF (CRAK).

CRAK is already on a tear. Maybe that story is a little more obvious. But you just watch: As America’s oil production cranks into higher gear, oil services and pipelines will ramp-up too.

All the best,
Sean Brodrick

Your thoughts on “Scraping the Bottom of the Oil Barrel”

  1. I surely do hope oil prices go higher, because that will make clean alternatives ever more affordable. Wake up, everyone, Trumps pullout of the Paris climate accord threatens every child on the planet.

  2. Because of razor sharp insight I happen to believe the price of oil two years from now will be substantially higher than it is now.

    Bo Flygare

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Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit. Working on…