Saturday, September 6, 2014

Oil Charts and Analysis

Oil investors got gob-smacked earlier this week when oil fell below $93 a barrel. The drop was blamed on a rise in global supply. Supply is rising, and that’s putting downward pressure on oil prices. The low of $92.50 on August 21 is important, so watch support there.

(Updated chart)
Here’s the good thing: There can be energy winners even when prices are in a short-term downtrend. Heck, there can be energy winners even if the downtrend is MORE than short-term.

I’ll explain. Earlier this week, I poured through energy industry reports, and some of the numbers on U.S. production were just stunning.

Here are some of the facts that crossed my path.
  • The Energy Information Administration reported U.S. oil output through June. It turns out topped 8.5 million barrels per day for the first time in 28 years. That’s a surge of 18% year over year.
  • Meanwhile, U.S. net petroleum imports in June came in at 4.66 million barrels per day. That’s the lowest – EVER – in the post-shale era.
  • Also, natural gas production is up as well. According to the EIA, from the week ending on April 4 through the week ending on August 22, net storage injections totaled 1,808 bcf. That’s up 27% from the same period last year. And it’s well ahead of the five-year average.
  • Nonetheless, nat-gas in storage dipped so low during the harsh winter that inventories are expected to be below the five-year average when injection season ends on October 31.
Obviously, the U.S. is producing a tremendous amount of oil and gas. This means there will be winners and losers. And they might not be the ones you think.

I find it likely that many of the losers will be high-cost producers. If they’re pouring product into a flooded market, profit margins will squeeze lower. On the other hand, low-cost producers should continue to do well IF they can keep raising production.

The winners will come in a number of areas.

Transportation: This includes railroads, pipelines and tankers. All that product needs to be moved from the pump to refineries and other distribution centers.

Not all transportation companies will be winners. But those serving booming oil and gas fields will do well. 
  • The U.S. Energy Information Administration expects that the Eagle Ford Shale produced 1.5 million barrels of crude oil and other liquids daily in July. That’s 411,000 more than a year earlier. Production should keep rising in August and September.
  • The Permian Basin is expected to produce 1.72 million barrels daily in September, up 38,000 barrels in a month. It made about 1.4 million daily barrels last year in September.
  • North Dakota’s Bakken produced 1.2 million barrels per day in July, up 280,000 from a year earlier.

These are just the current leading fields in U.S. oil and gas production. There will be others.

For example, I expect we’re about to see a boom on Alaska’s North Slope. When I was in Deadhorse, Alaska a few weeks ago, the town was a beehive of activity. And it exists for one reason: To service oil and gas drilling and production on the North Slope.

And the U.S. Gulf of Mexico is about to see its oil and gas production get a second wind, as the government has auctioned off hundreds of thousands of acres to eager companies.

Every drop of oil and gas that is produced needs to be transported. Keep that in mind.

End-Users: If prices will remain under pressure in the short-term, we could see strong rallies in companies that use a lot of fuel. This includes chemical manufacturers, airlines and shipping companies.

It also includes automobile manufacturers that have lots of higher-end, gas-guzzling vehicles to sell. Recreational boat manufacturers should also do well.

Oil Services Companies. Oil and gas producers need to squeeze every dollar they can out of production. The way to do that is to hire select oilfield services companies that get them more bang for their buck. In North Dakota, the active oil rig count is close to 200 and the highest level in nearly two years.

So, select drilling and oilfield services companies could do very big business.
There are plenty of ways to play this trend. I’m already recommending new picks to my Oxford Resource Explorer and Gold & Resource Trader subscribers.

If you’re doing this on your own, remember to do your own due diligence.

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