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US Shale Oil Becoming a Global Player

11 April 2013 in Trading Ideas

It’s probably a safe assumption that when your surging oil production is making Middle East nations sit up and take notice, something is definitely working.

As the Wall Street Journal reported last month, OPEC – the world’s leading oil cartel led primarily by countries in the Middle East and Africa – announced that it was cutting its forecast for demand of its own oil for 2013, in large part because of growing production from US shale deposits.1

Specifically, OPEC said it expected that rising production from North America would cut another 100,000 barrels a day from its expectations, putting it 350,000 barrels a day below 2012 levels.

What’s more, the Journal said those reduced levels could mean that OPEC winds up supplying only 33.1% of overall oil demand this year, down from 35% in 2012, and its lowest level in 11 years.

The US boom in production has many analysts questioning how long – and to what extent – the cartel can continue its decisive influence over global markets, a position that it has held since the 1970s. In October, the International Energy Agency forecast that US oil output could overtake that of OPEC leader Saudi Arabia by 2020, forcing the Arab nation to alter its trading patterns.

Already, OPEC member Nigeria saw its exports to the US fall by half in 2012 from 2011, the Journal said.

And US oil production growth doesn’t appear to be waning. The US Energy Information Administration expects output to rise to 7.25 million barrels a day this year, and then to 7.82 million barrels a day in 2014.2 The EIA has said that most of the production growth over the next two years will come from drilling in tight rock formations located in North Dakota and Texas.

This upbeat picture forms the thesis for our new Shale Oil motif, a portfolio of stocks of energy-producing companies that could benefit from the production boom in US oil-rich shale formations.

According to the EIA, the increase of this so-called tight oil production has been driven by the use of horizontal drilling in conjunction with hydraulic fracturing, or “fracking,” which can provide high production rates, which could trigger high revenues at current oil prices.

Naturally, the changing dynamic for US companies isn’t without risk. They’re still at the mercy of global oil demand, which is somewhat uncertain amid pockets of global economic stagnation, and the Journal cites the potential of high rates of declining production associated with the new types of wells now being implemented.

For now, however, the possible promise of increased market share in perhaps the world’s key commodity may be sufficiently attractive for aggressive investors.

1Sarah Kent, “OPEC: US Shale Oil to Cut Into Demand, WSJ.com, March 12, 2013, (accessed April 9, 2013).

2US Energy Information Administration, “Short-term Energy Outlook Supplement: Key drivers for EIA’s short-term US crude oil production outlook,” Feb. 14, 2013, http://www.eia.gov/forecasts/steo/special/pdf/2013_sp_02.pdf, (accessed April 9, 2013).