Redefining “Cheap Oil” for the Next 10 Years

12/04/2013 10:45
by Matt Insley

Radio the air traffic controller… return your seats to their upright position…

Make sure the runway lights are on… ready the brightly-colored ground crew!

The “blackbird” is in its final approach and set for landing.

Today we’ll take a detailed look at an important landing zone for one of the hottest commodities right now, and why this touch-down event will provide our next long-term profit opportunity…

From a short-term high over $108 a barrel, crude oil began its descent. Since late August, the price of crude is down some 12%.

Today the blackbird is in its final approach to a landing zone we shared a few weeks ago. Here’s a look…

Light Crude Oil - Spot Price

A quick look at crude’s recent price shows that it is much closer to $90 a barrel then it’s been for the past four months. And as you can surmise from the chart above, a quick dip lower — to the $80-range — isn’t out of the cards, either.

Today we’ll scan the long-range radar for crude’s long-term direction. As you’ll see the blips are painting a rather vivid picture…

America’s oil production has since skyrocketed — thanks to the U.S. shale boom. Today we’re producing nearly 8 million barrels per day (bpd) here in the U.S. – for reference, during a trough for production in 2005 we produced a mere 4.2 million bpd.

US Oil Production 1920 to present

The turnaround has been spectacular and according to this week’s report from the International Energy Agency (IEA) the U.S. is set to be the world’s #1 producer of oil by 2015. For those keeping score at home, that smashes a 2011 forecast from Goldman Sachs that said the U.S. would move to the top spot by 2017.

Looks like we’re two years early to the party – much to the benefit of Americans and U.S. investors alike!

Last week I was kicking rocks in the South Texas Eagle Ford. Now I’m headed to the capitol of the Rust Belt (revival) Pittsburgh, Pa.

But regardless of where I lace up my boots – North Dakota’s Bakken, Pennsylvania’s Marcellus, the West Texas Permian Basin, the South Texas Eagle Ford, or others — I’m seeing the same trend: more drilling, more knowhow, more efficiencies and more importantly more production.

The result? Thousands of shale wells are being put onto production each year.

Combined with the field reports are the statistics. A quick glance at the most recent report from the U.S. Energy Information Administration and you’ll see the same concrete trend. More efficiencies, more knowhow and more production. (Just take a peek at the tail end of the U.S. production chart above!)

With all of this new production hitting the pipelines it’s no wonder the price for crude oil is under pressure. And under $100…

The blackbird is landing. But does that mean we’re in for a decade of “cheap” oil?

Well, yes and no.

Before I explain, understand this caveat: oil doesn’t have to be “cheap” or “expensive.” There’s certainly middle ground when we’re talking about a supply and demand driven commodity, like crude.

So when I say oil is “cheap” I’m just implying it’s under the psychological $100 level – or a level that spurs economic growth and doesn’t impede it.

“Cheap” oil does NOT, however, mean $20, $30, even $50/barrel. In that sense the good old days are truly gone. Unless there’s a catastrophic economic meltdown that pulls demand back, we’ll never see those prices again. And if we do see them, much like we saw in 2009, the market will quickly recover and pull prices back to a baseline level.

The most established baseline level we’re seeing here, in the post-2008 meltdown world, is $80.

That said, we are indeed in for a decade of “cheap” oil. According to what I’m seeing in the U.S. oil fields and the data that crosses my screen on a daily basis we’ve got a good 10-15 years of shale oil drilling ahead of us. I won’t go out on a limb and say when/where this boom will peak, but I will say that the U.S. has ample supply of oil and gas prospects for the next decade. The needle on America’s energy gauge is moving in the right direction.

In that sense I don’t think we’ll see sustained oil prices above $100 (shielding my forecast from inflation I’ll say $100 in “2013 dollars.”) Sure, I think we’ll see plenty of Middle East-driven flare ups that spike the price over the $100 mark, but again it won’t be a sustained rally.

It’s a goldilocks scenario here in the U.S.

Oil isn’t going to go too low, to stop oil producers from turning a profit (not for long anyhow) and oil isn’t going to go too high to impede a global economic recovery.  This is great news for Americans and U.S. investors alike.

Keep your boots muddy..



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