Pros and Cons of the U.S. Shale Oil Boom (Really?)

Ten years ago, who would have imagined this headline?

I remember a comment made almost in passing by a mentor of mine, circa 2005. At the time, oil prices had spiked north of $50 per barrel, which was historically very high, and appeared set to continue rising. Worse, the U.S. – and a large segment of our economy – seemed almost totally dependent upon foreign countries harboring various levels of hostility against us.

Against this backdrop, my mentor said something to this effect: "What the U.S. needs is like another 'Manhattan Project' – only this time, the project would be coming up with a way for our country to become energy independent."

Perhaps you have similar memories of "pre-fracking boom" life in America.

Quite honestly, I have a hard time imagining any "negatives" (or "cons") associated with the U.S. oil boom. Anything I can think of is a real stretch. The biggest one, as far as markets are concerned, is the volatility we've experienced since oversupply began causing falling oil prices last June. Even at that, though, the broader economy and stock market continue to expand into record territory. Of course, energy companies have been hurt. But most other sectors and market participants have been helped, and besides, those same energy companies have been enjoying tremendous growth up until last summer. And I’m sure this, too, shall pass, even for producers (or at least, those that survive).

Awash in oil

Today, thanks in large part to the U.S. oil boom (courtesy of, shall we say, "Manhattan Project II"?), the world is awash in oil and oil products.

In the supply glut's wake, rig counts have been steadily and severely declining; however, production is still very high in spite of the cuts. Most of the best-producing rigs are still pumping, as are Saudi Arabia, OPEC, and other producers.

Oil prices fell on Wednesday, the day before a U.S. oil inventories report, in anticipation of record stockpiles. When the report came in on Thursday, inventories were much higher than expected. Take a quick look at some of the numbers from the U.S. Energy Information Administration (EIA), taken from a Reuters article on Thursday.

• "U.S. commercial crude oil inventories rose by 7.7 million to a record 425.64 million barrels in the week ended Feb. 13."
• "The build was the biggest weekly addition in barrels since records began in 1982, exceeding analysts' expectations of a 3.2 million barrel rise."
• "Gasoline stocks rose by 485,000 barrels compared with analysts' expectations in a Reuters poll for a 167,000 barrels gain. Distillate stockpiles fell by 3.8 million barrels, versus expectations for a 2.1 million barrels drop."




Big report, no?

Forward-month Nymex crude presently trades (as of this writing) around $51, down from a peak above $107 last June 20th. If oil prices should continue lower, here are the key levels to watch, per Adam Hewison's daily market commentary on Thursday, February 19th:

"First support is the 20-day moving average crossing at 49.26. Second support is January's low crossing at 43.58."

Of course, refiners love paying lower prices for crude… but the price they can command for their end products have plummeted also. Many refiners’ stocks have skyrocketed to 52-week highs in recent weeks. At the same time, a United Steel Workers (USW) strike has affected many refining companies. My next article will look at managing your positions (if any) in refining stocks.

Oil supply for the rest of 2015: mixed forecasts

According to a Bloomberg article on Wednesday, EOG Resources (NYSE:EOG) forecasts reduced U.S. production in 2015. The IEA forecast, in sharp contrast, shows 7.8% domestic production growth.

The article quotes EOG Chairman and CEO William R. Thomas as saying, "We do not think it's wise or prudent to accelerate oil when oil prices are low, especially when the rebound in price could come this year or maybe even next year." He believes many other firms will see things the same way.

Oil demand expected to grow… slowly

The Wall Street Journal's "Heard on the Street" column on Monday addressed global oil demand forecasts, as follows:

"Last week, the IEA released medium-term forecasts showing global oil consumption rising by 6.6 million barrels a day by 2020…. At 1.16%, compound annual growth of global demand in the IEA's latest medium-term forecast is the weakest since 2009."

The article cites the following as factors leading to slower demand growth:


• Slower demand from China
• Slower demand from oil-producing countries, whose economies have been impacted by the current oil crash
• Oil intensity in terms of barrels per dollar of GDP continues to fall steadily
• Aging demographics
• Continued adoption of alternative energy sources




Finally, the article points out that the IEA's current 5-year projection is about 1 million barrels per day lighter than 2014's 5-year projection was.

The article's comment?

"That may not sound like much, but consider that excess supply weighing heavily on prices now is estimated to be only around 1.5 million barrels a day."

Best,
Adam Feik
INO.com Contributor - Energies

Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.