Remember the gasoline shortages of the 1970s? And how we all thought the world was going to run out of oil?
Heck, they even based whole movies on it. Movies like “Mad Max.” Apocalyptic psychos short on oil but with a surplus of body paint; fighting over the last few barrels.
Well, you can take all those dire warnings, crumple them up and throw them in the trash can at the nearest gas station.
That’s because the U.S. is turning the oil market on its head. And this has the potential to shake markets around the world.
I can prove it to you in four charts …
Let me start by showing you something you probably know. Then we’ll move on to the “gee-whiz” part.
First, you KNOW that, when it comes to crude oil, the U.S. is now outproducing Russia, and is closing in on Saudi Arabia, right? Here’s a chart I made on Bloomberg …
The reason is rising U.S. shale output. Total U.S. crude oil production is around 10 million barrels per day on average, with most of that coming from shale reserves. And most of that from two basins — the Bakken and Permian. The Eagle Ford is also helping pump up the volume.
BP and other experts, including the U.S. Energy Information Administration, expect the Bakken and Permian shales to drive growth going forward.
And where does that lead us? Here is the latest forecast from energy giant BP …
According to BP’s 2018 Energy Outlook, U.S. share of world oil supply will rise to 21% by 2035. That’s not that far away. And it will leave former top dogs Saudi Arabia and Russia in the dust.
For its part, the EIA said total U.S. oil production could hit 12 million barrels per day by the early 2040s. And most of the growth would come from the Bakken and Permian.
This is a big change in outlook. Not too long ago, experts thought production from the shale plays would fall off quickly. Now, not only is production rising, but production per rig is rising.
I can tell you this is not what the experts previously predicted.
Why? Because things change.
See, there’s a change in how shale deposits are tapped. Now, producers are doing what is called “Cube development.” This means drilling and tapping multiple layers of petroleum-soaked rock in a shale basin all at once.
As this illustration I snagged from Bloomberg shows, this new approach is a change from the past, when deposits were trapped by one two wells, one layer at a time.
The Best Laid Plans …
I’m sure we’re all weeping crocodile tears over how this new tech is upsetting the well-laid plans of the oil cartels, right?
For their part, Russia and OPEC aren’t taking this lying down. They’re talking about extending their alliance to curb oil production. Last year, they met their target by an astounding 120%.
I wish them all the luck in the world with that. Because the less oil the Russia-OPEC alliance pumps, the more room for the U.S. to grab global market share.
See, oil is a “fungible” commodity. It can be shipped anywhere. The only limitation is shipping costs.
And that’s why, even with U.S. oil production surging, the U.S. is not swimming in oil and gasoline.
The EIA said net crude imports fell last week by 1.6 million barrels per day to 4.98 million barrels per day (bpd). That’s the lowest since the EIA started recording the data in 2001.
Meanwhile, U.S. exports of crude jumped to just above 2 million bpd. That’s near a record 2.1 million hit in October. And that helped push net U.S. imports to the lowest level on record.
In fact, I’ll throw in a bonus chart. U.S. crude oil inventories. They plunged unexpectedly to 1.6. million barrels in the week to Feb. 16.
Why? Because America’s oil is competitively priced on the global markets. As I said, U.S. exports are surging even as imports plunge.
Enter China
And this means we may be battling Saudi Arabia and Russia for the biggest oil prize: China market share.
You probably know that the U.S. and China are the largest crude oil consumers in the world. Well, China’s crude oil imports increased by 1.63 million bpd in January, to a new record of 9.57 million bpd. That’s a 21% increase. China’s increased demand is bullish for oil prices.
China’s annual crude oil imports averaged 8.4 million bpd in 2017. Obviously, that accelerated in January. Its economy is shifting into higher gear, and that means more oil demand. And the more Saudi Arabia and Russia curb their production to support prices, the more American producers will step into the breach to supply Chinese demand.
Indeed, rising oil supply from non-OPEC countries may cover global demand growth for the next two years, according to the International Energy Agency. And a big part of that is going to be U.S. oil production.
How to Play This
Not everybody is going to win in this market. That’s why many oil companies have been dragging butt lately. But if you can find a company that is boosting production, lowering costs AND has plenty more targets to tap, that company can be a winner.
Likewise, select oilfield services companies can do quite well.
You might start by picking through the best stocks in the SPDR S&P Oil & Gas Equipment and Services ETF (NYSE: XES). Do your own due diligence, and you better be able to stomach volatility.
But those pullbacks can be bought. It’s time for new oil prophecies, as America is going to be an oil power in the 21st Century.
All the best,
Sean Brodrick
