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The Great American Oil Boom Leads to … Rising Prices?

oil Rosenberg recession

It’s easy to get distracted. We have a tendency to see what is right in front of us and miss everything else. But as investors, looking beyond the spotlight is where great opportunities can be found.

Right now, the market is focused on the escalating trade war with China, the Fed rate hike and the Kavanaugh-Supreme Court situation. If you watch business news you’ll hear about all three, but if you watch the regular news you’ll probably only hear about the last one.

In the meantime, there is a huge story out there that is being missed. The United States has officially become the world’s largest oil producer. Cranking out a record 11 million barrels per day (mb/d) this country has eclipsed the production of both Russia and Saudi Arabia.

Think about that one. Remember the gas lines of the 1970s? Saudi Arabia enforced an oil embargo and supplies dried up and gas prices tripled. The whole country was held hostage by a few oil sheiks.

In the years and decades that followed, this country rued its dependence on foreign oil. But for all the mileage and energy efficiency standards, technological improvements and political promises; America’s insatiable foreign energy dependence continued to get worse. We hit a low in 2007 when we were importing about two thirds of our oil needs and exporting roughly $400 billion overseas annually.

Then something happened.

New technologies in horizontal drilling and hydraulic fracturing (fracking) enabled accesses to previously irretrievable oil and gas trapped in the country’s vast shale formations. Energy production exploded overnight and in a few short years this country went from being a marginal energy producer to the world’s dominant energy powerhouse. Take that OPEC.

So we have all this oil and prices are going up?

From a low of under $30 per barrel after the global oil price crash in early 2016, U.S. crude oil (West Texas Intermediate WTI) is more than $73 per barrel and very near the post-crash highs, and up more than $20 from a year ago. It seems like rising supply should lead to lower prices not higher.  The main culprit is the global supply/demand dynamic.

Prices are rising partially because of cutbacks and bankruptcies during the price crash and also because Russia and Saudi Arabia agreed to cut production to get prices higher, and they have stuck to it. But the real catalysts for higher prices right now are Iran and Venezuela.

U.S. sanctions are biting Iran’s production and are scheduled to go into full swing starting in November. Analysts estimate that Iran alone will account for between one and two mb/d being taken out of world supply. Venezuela’s oil production has also crashed because of instability there.

This country is cranking out as much oil as possible with the current infrastructure. There are bottlenecks forming in the shale regions. We probably can’t produce any more in the near future. Russian and Saudi Arabia are also operating with little excess capacity.

Analysts argue that the market simply doesn’t have a supply response for a potential disappearance of 2 mb/d of global supply in the fourth quarter. Upward pressure on prices will be strong.  Some analysts are calling for $100 oil by the end of the year.

So, we have US oil producers pumping out oil at record levels while prices are high and going higher. It should be a good time to buy companies leveraged to the price of oil including the integrated majors Chevron (CVX) and ExxonMobil (XOM), as well as companies in the exploration and production sector.

While everyone else is focused on things Brett Cavanaugh wrote in his high school yearbook, a great trading opportunity is emerging beyond the noise.