Saudi Arabia and U.S. oil majors, most based in Texas, have had a symbiotic economic relationship ever since oil was found in Dhahran in 1938.
The oil superpowers and some oil stocks are riding high again, as Saudi Arabia launches a “shock and awe” campaign to raise oil prices.
Goldman Sachs now expects prices for Brent North Sea oil, the world standard, to rise to $67.50 per barrel this spring, with OPEC production having already been cut by 800,000 barrels per day over the last few months.
The Texas Shale Boom
One result is that a shale oil boom that re-ignited in Texas last year is going to accelerate into 2019.
The question is who will profit.
The Texas Independent Producers and Royalty Owners Association (TIPRO) reports that the state’s production in 2018 came to 1.54 billion barrels, up from 1.03 billion in 2017 and 20% ahead of the previous record set in 1973.
This helped make the U.S. the world’s largest oil producer, ahead of Russia and Saudi Arabia.
The boom in production is extending into 2019, with the Energy Information Agency reporting 11.9 million U.S. barrels per day came up the week of Feb. 8, compared with 10.25 million barrels during the same week a year ago.
The reason, as I noted in writing about Exxon Mobil (NYSE:XOM) earnings on Feb. 1, is an infrastructure disconnect. There’s not enough pipeline capacity for all this new shale production, and U.S. refineries have long been tuned to heavier grades of imported crude anyway.
So while Permian independents like Concho Resources (NYSE:CXO), which produced 310,000 barrels of oil equivalent per day during the fourth quarter, expect to see prices rising from the $53.77 level they were at Feb. 14, they’re not rising quickly as Kinder Morgan (NYSE:KMI) races to add pipeline capacity. Note that while it’s now legal for the U.S. to export crude oil, the spread between WTI and Brent prices is over $10 per barrel.
The biggest producers of “sour” or “heavy” crude, Venezuela and Iran, are subject to U.S. sanctions, while gasoline “crack spreads” — the margin between the cost of crude and what refined products bring — continue to fall. Refiners are now short the “heavy” crude they’re accustomed to, while U.S. fracking companies deliver a bumper crop of “light” crude to the market.
Oil that is easiest to refine and closest to the market, as on the U.S. West Coast, is now priced near $62 per barrel, while oil that can’t reach the market, like Canadian Crude, is still selling at under $40 per barrel.
The winners in this market would thus seem to be oil stocks that can trade oil, ship oil and arbitrage the price. But that’s not the way the stock market sees it.
The Bottom Line on Oil Stocks
Exxon Mobil stock hit its high for the decade in early 2014, and is currently 17% below that figure, even with a rally that began in December. During this decade, Exxon has become a dividend stock, increasing the dividend in five years from 63 cents per share to 82 cents, yielding 4.3% at the company’s price of about $76 per share on Feb. 14.
Meanwhile, Concho Resources, which pays no dividend, has stock worth 23% more than five years ago. Since the start of 2019 Concho is up 16% while Exxon is up only 11%.
This should be Exxon’s market, but it’s producers like Concho that are currently getting the love from investors due to higher production.
I may be wrong, but it looks like investors are making a mistake.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.