The U.S. might finally be able to give OPEC the metaphorical middle finger.
As hydraulic fracturing continues to sweep the nation, our oil and natural gas reserves continue to increase — so much so, the Energy Information Administration now predicts that the United States has 58 billion barrels of unconventional shale oil waiting to be tapped. That amount doesn’t include our nation’s vast shale natural gas and offshore potential, nor our more conventional oil assets.
But you already knew that.
No, this latest “sticking it” to the oil cartel has do with the pricing of all of that crude oil.
Back on Top
At one time West Texas Intermediate crude oil — what we produce here in the U.S. — used to be the world’s energy benchmark. Texas Tea’s ascension began in the 1980’s when the U.S. government deregulated oil prices and changed the trading mechanics of crude oil. WTI was commoditized, and given the oil’s “sweetness” it rose to be the world’s most popular crude oil benchmark.
All of that was good and dandy until 2007, when some issues with supplies hurt the benchmark. Pricing anomalies occurred because of a temporary shortage of refining capacity. Earlier that year, a large stockpile of oil at the giant Cushing, Oklahoma storage and pricing facility caused price to be artificially depressed after a critical refinery shut down. WTI traded well below the Brent crude oil metric for the first time.
After a few years of this disparity, Saudi Arabia and Kuwait ditched WTI as a benchmark in favor of the Argus Sour Crude Index, which is closely tied to Brent prices. Iraq followed suit in 2010 and soon the rest of OPEC was using the more international Brent as their major pricing benchmark.
The death knell for WTI as the world’s major crude benchmark came when now-defunct Lehman Bros created a research report that indicated that crude type was “no longer a gauge of the international oil market.” Blaming a lack of pipeline, export and storage capacity, the former investment bank concluded that the price deferential would stay high for many years.
Well, it looks like WTI will get the last laugh on the Middle East.
All of that rising production in places like Bakken and Eagle Ford is being tapped in spades. New pipelines and crude-by-rail terminals are allowing the sweeter crude to be moved where it’s needed. Refiners continue to drink-up the easier to “crack” crude oil by the barrelful, and there’s even talk about exporting our overabundance to emerging markets in Asia and South America.
All of these factors are helping diminish stockpiles in Cushing and driving prices for WTI upwards. So much in fact, that West Texas Intermediate has climbed to its highest price in more than 16 months. Perhaps more importantly, spread between WTI and Brent is now at narrowest since October 2010.
How much is the price difference? A whopping 67 cents.
There could be more gains ahead, and some analysts are even predicting that WTI will overtake Brent before the end of his year as potential U.S. exports begin taking shape. Those oil prices will remain supported by signs of stronger demand in the United States as well as fears of a disruption in Middle East supply caused by Egypt’s political turmoil. Many nations — like China — have been keen on getting their energy from more political stable countries like the U.S., and the premium could exist for far longer than expected as oil thirsty regions are willing to pay a bit extra for safety.
Playing the Surge
With the potential for WTI to be back on top and really move into the international spotlight once again, the time could be right to bet on the crude benchmark. A prime way would be the United States Oil ETF (USO). The ETF reflects the returns that are potentially available through an unleveraged investment in the WTI futures contracts.
So far, the fund is up about 13% this year as WTI has made its move towards Brent. However, more gains could be in store for USO as the lighter sweeter crude benchmark regains its crown. The fund is also a cheaper and more liquid option than its chief competitor fund — the iPath S&P GSCI Crude Oil TR Index ETN (OIL). Expenses for USO run 0.45%, or $45 a year per $10,000 invested. In comparison, OIL charges $75.
Keep in mind that USO does occasionally suffer from periods of contango when it “rolls” over to the next month’s future contract. That can hinder its performance and cause it not to track WTI prices perfectly. However, it’s probably the easiest way to get your hands on the crude oil benchmark other than opening up a futures account yourself.
The other option for playing WTI’s dominance is buying shares in some of the great U.S. focused E&P firms. Companies like EOG Resources (EOG), Continental Resources (CLR) and Whiting Petroleum (WLL) have all surged on rising production tied to WTI prices. It stands to reason that they’ll move even higher is the benchmark regains its crown.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.