Time to Bet on the U.S. of Oil?

Sean Brodrick

The price of benchmark U.S. crude oil rallied to more than $91 last week, intriguing potential investors while scaring cash-strapped consumers about where oil prices will go next.

Oil prices are up – hitting a seven-week high after the last-minute fiscal cliff deal came together. Demand is on its way up as well. But with supplies also on the rise, this could mean good news for investors and consumers, as we’ll see in just a moment.

From a price perspective, West Texas Intermediate — the U.S. crude oil benchmark — has broken out of its recent price range. It has now retraced half of its tumble from September to November, as the chart below shows.

(Updated chart)

That’s where oil prices are now, but what does this tell us about where they are heading? Here are three important points to consider …

First, the world IS using more oil. Global oil consumption increased to 89 million barrels per day in 2012.

However, Western countries are using less — down 4.8% from 2008 to 2012. But at the same time, developing countries are using a lot more — up 15%.

In China, meanwhile, demand grew a whopping 28% from 2008 to 2012. Heck, China’s oil demand grew 9.1% year-over-year in November alone, at a time when it is experiencing relatively — for China — “slow” growth.

But even with this global consumption bump, production isn’t currently keeping up the pace.

Second, output in OPEC slipped by 110,000 barrels a day in December, down to a nine-month low. Saudi Arabia’s production dropped to the lowest level since October 2011.

But we’re not in danger of running out of oil, not right away … and not in the United States. That’s because one of the biggest oil consumers is turning into an even-bigger player on the production front …

Third — and here’s the good news — world oil is actually in surplus. In the third quarter, global oil output actually rose to 90.8 million barrels a day.

Rising output in Libya and the United Arab Emirates, and a big year-over-year climb in Iraq, are keeping downward pressure on prices. Outside of OPEC, we are seeing production ramp up in Mexico, Canada and other countries that are friendly toward the United States.

And guess who is seeing enormous oil production growth? The United States, which should change its name to the “United States of Oil,” judging by this production chart looks …

As you can see, U.S. crude oil production has spiked recently. According to Energy Information Administration (EIA) estimates, U.S. crude oil production hit 6.4 million barrels per day in 2012, up 14% from 2011, because of the increase in production of shale oil.

In fact, the EIA says that the U.S. oil production has seen its largest rise in annual production since the middle of the 19th century.

Add in Mexican and Canadian production, and total North America oil production is projected to average 12.43 million barrels per day in 2012 — larger than total capacity of top producer Saudi Arabia.

What’s more, U.S. oil production is expected to rise another 11% next year!

A bombshell report by the International Energy Agency concludes that, due to lowered demand and new drilling techniques that will unlock shale oil and offshore reserves, the U.S. could become the world’s largest oil producer before 2017 and could stop importing petroleum altogether by 2035.

Although I think that’s a bit optimistic, the trend is definitely our friend and we should be ready to take advantage of it.

Gas Prices Capped … for Now

So does all this extra oil mean lower prices at the pump? Not as much as you think.

In fact, study after study has shown that drilling and domestic oil production have little effect on gasoline prices. Those are more affected by economic growth — both here in America and around the world.

The good news is that U.S. stockpiles of gasoline are growing along with oil — which means we’re using less gasoline — so that should keep a lid on gasoline prices for now. But U.S. refiners are also exporting more and more product — so that may not last.

There are going to be some big winners and losers in the energy markets in 2013. And starting this coming Sunday, I’ll be sharing them with you here in Uncommon Wisdom Daily.

In the meantime, if you’re looking for an easy way to play this sector, consider the Energy Select Sector SPDR (XLE), which tracks a basket of leading oil companies.

Keep in mind, however, that the obvious winners like the big oil companies aren’t necessarily the ones that are positioned to do the best. In fact, some winners will downright surprise you. Again, check your e-mail starting this Sunday and you’ll see why I’m so excited about this sector for 2013 … and beyond!

Good trading,

Sean

P.S. Keep an eye on this space starting this coming Sunday for my take on one of the best places to invest in post-Fiscal Cliff America. See what’s becoming ripe for the picking not just in the cliff’s aftermath … but also for many weeks and months to come. Plus, stay tuned and find out how to get positioned for one of the biggest investing opportunities of 2013!

Your thoughts on “Time to Bet on the U.S. of Oil?”

  1. Sean,
    I answered the survey questions and sent it to you earlier today. You sent the registration confirmation for the webinar this Wednesday the 9th and a link to click for the free report, pick & shovel fortunes in the new gold rush. The problem is that the report would not down load. How can I get it?

    Bill

  2. It would be interesting to see a chart comparing those countries that drill based on abiotic principles vs those that don’t. i still can’t believe there’s people who still hold the “dead dinosaur” theory when the BP disaster showed how ludicrous that was when they were drilling miles deep.

Comments are closed.

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.