by Aaron Levitt | October 24, 2013 11:30 am
There’s no way around it — the E&P industry in North America is turning out tons and tons of oil.
By fracking regions like the Bakken and Eagle Ford, the oil and gas industry is setting America on a course to energy independence.
Analysts at the Energy Information Administration (EIA) now expect the U.S. to produce an average of 7.5 million barrels a day of oil this year. That number will rise to roughly 8.4 million barrels a day in 2014.
This is certainly great news. Except for one slight problem: It’s creating a huge supply glut.
As we’ve fracked along, inventories have continued to rise. That’s a big issue, because American’s current demand isn’t coming close to using those big inventories. While we still import some oil — mostly from Canada and Mexico — supplies across the U.S. continue to rise. That’s managed to push prices from NYMEX traded Texas Tea down below $100 per barrel for the first time in months.
However, they won’t stay that way as many long-term catalysts are ready to send prices higher in the future. For investors, the time to buy oil stocks could be on.
West Texas Intermediate (WTI) has fallen had over the last few weeks as demand simply hasn’t kept up with rising inventories. As E&P firms continue to tap our shale resources at a rapid pace, supplies of crude oil in America have risen to record highs.
After being delayed due to the government shutdown, the EIA report for the week ending Oct. 18 showed crude oil supplies expanded by more than 5.2 million barrels. That was more than expected by analysts and pushed inventories to 379.8 million barrels — the highest amount since July and above five-year averages.
What’s more important is that those supplies have risen 6.8% — or 24.2 million barrels — in the last five weeks alone.
Given the bearish picture facing WTI, is understandable that prices for American crude oil benchmark would take a hit, all the way past the psychological $100 per a barrel mark. December futures for WTI can currently be had for only $96.40 per barrel. That’s the lowest settlement price on the NYMEX for WTI since June.
Overall, WTI futures have slipped about 6% since mid-October.
While there are plenty of reasons to be sour on WTI crude at the moment, the longer-term picture is still quite rosy for oil producers and oil stocks.
First, drilling costs continue to rise … by a lot. Using of all this high-tech gear in order to frack a well or drill deep offshore is getting downright expensive. According to think tank McKinsey, the inflation-adjusted average cost of starting a new oil well has more than doubled over the past decade. Meanwhile, the most advanced deepwater drilling rigs can cost about $600,000 a day to rent.
These higher and higher costs need to be covered by producers in order to justify drilling in the first place. Oil prices need to be high and if they’re not “cutting the mustard,” E&P firms will stop drilling and cut supplies. Think about natural gas just a few months ago. The same scenario will play out in the oil markets.
Secondly, new sources of demand may be at hand. But they aren’t coming from here in the U.S.
Currently, it’s illegal for producers in the U.S. to export their bounty to nations without free-trade agreements. However, given the huge plethora of supplies and the desire to keep jobs growing, exports could be a thing of the future. Already, several CEO’s of energy companies shave begun drumming up support for the idea and analysts estimate that the U.S. will begin exporting crude within a few years.
That will once again make WTI an international benchmark and with that prestige comes more global demand and higher prices.
With WTI falling, investors are being given an early Christmas present — an opportunity to buy energy stocks. As crude has fallen, so have share prices for several producers like EOG Resources (EOG) and Cabot Oil & Gas (COG) … although both oil stocks have regained a sliver of those losses so far today.
Given the longer-term picture, the markets are giving portfolios are great chance to re-up exposure to oil stocks. Of course, an exchange-traded fund remains the easiest way to buy oil stocks.
Fellow InvestorPlace contributor Lawrence Meyers recently recommended the Energy SPDR (XLE) as good ETF to hold for life. I like the pick and you could certainly do worse, but my personal favorite way to play WTI crude would be the iShares U.S. Energy ETF (IYE).
The ETF tracks 82 domestic energy firms across all sub-sectors of the industry. This provides exposure to the E&P players, refiners, midstream and oil service stocks. There are even a few alternative energy names — such as First Solar (FSLR) — as well. The fund also provides exposure to faster growing small- and mid-cap players. That gives investors an opportunity to play the current low price situation (the refiners will have juicer margins) to the high (the producers will be better).
That diverse focus has allowed the fund to rack up some impressive annual returns of 14.18% over the last 10 years. Fees run a cheap 0.45%, or $45 per $10,000 invested.
All in all, the current low price market for WTI crude won’t stay this way forever. That means investors should run, not walk, into energy and oil stocks. The iShares U.S. Energy ETF is the best domestic way to do that.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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