The energy sector is a huge part of the economy. No matter how vital it is, though, oil is still a commodity and subject to the whims of supply and demand. Market news is released daily about the crude oil production of OPEC nations, how many barrels of oil are in the marketplace, and what traders think about crude oil futures prices. Needless to say, investing for the long term based upon what the market expects this month, this year, or at any time is a fool's errand. The ability to produce at a low cost is arguably the best strategy in today's world. The current market dynamic is indeed interesting, particularly in light of OPEC's recent commitment to production cuts. But as we saw when this downturn began, the only sure thing about current oil prices is that they will change.
Read on to learn what current oil prices mean for true oil stock investors.
Data source: CME Group and ICE . Data as of 9/6/2017. Chart by author.
WTI Crude Oil Spot Price data by YCharts
Shale remains resilient
Despite OPEC's best efforts, US oil output has managed to surge to its pre-downturn levels:
This resilience in the face of depressed prices is thanks to continued efficiency gains on the part of shale drillers . For many producers, costs have fallen over 30% and are approaching $30 per barrel for some of the strongest producers . These advances show no signs of stopping. During a presentation last year at the University of Chicago's Energy Policy Institute, BP's Chief Economist Spencer Dale, went on the record saying that a 25% recovery factor might be conservative by early 2020's . Given that most producers are ecstatic with 10-12% oil recovery, oil producers entering a brave new world .
Making matters worse, the EIA recently reported that there's another looming threat: drilled-but-not-completed (DUC) wells:
Source: U.S. Energy Information Administration. August 17, 2017 Drilling Productivity Report .
These wells await the day when the oil they produce can fetch top dollar. You can't blame oil companies for putting a cork on these wells. The existence of these 7,000+ DUC wells is a dark cloud hanging over oil prices. Threatening to oil to market the instant oil prices show signs of life.
No matter how hard OPEC has tried, U.S. oil production remains resurgent. Image source: Getty Images.
OPEC intervention remains the wild card
Recent inventory draws exist against the backdrop of a much bigger trend: OPEC 's production . The current downturn began in the summer of 2014 when prices began to slide from their $110 high to approximately $75 per barrel. Then, on Thanksgiving 2014, the global oil markets became far more dramatic. That weekend, OPEC chose to maintain production in the face of surging U.S. production. This was a massive strategic shift. Before then, OPEC (particularly Saudi Arabia) held as its stated purpose to adjust production in support of market prices . Since then, oil has suffered from the excess supply as all players chased market share.
Finally, exactly two years later, OPEC threw in the towel. OPEC cut production i n November 2016 in an admission that member countries need much higher prices to balance their budgets. Saudi Arabia led the charge, assisted by non-member Russia. Since then, OPEC has tried desperately to balance oil markets through supply reductions. Crude prices turned upwards at first. But, as the old saying goes, the jig may be up. Traders of crude are too afraid of resurgent U.S. production.
For now, OPEC remains committed. OPEC and its allies have committed (at least verbally ) to withhold 1.8 million barrels of daily production -- amounting to 2% of the world's production -- through at least March 2018. The move is impressive, and as inventory draws show, the market does appear to be tightening. How high oil prices can rise in the face of resurgent US production is another question.
Bottom line for energy investors
OPEC appears genuine in their attempts. In fact, in a rare public statement echoed by multiple OPEC member states, a joint press release declared that "all options, for example, potential expansion" remained on the table. A final decision on the matter will come when OPEC meets in Vienna, Austria, on Nov. 30, 2017.
No matter what happens to oil prices, investors need to focus on low-cost oil producers. Companies such as EOG Resources (FY 2016 Proved Reserve Acquisition Costs of $12.12 per barrel), Apache Corporation (FY 2016 Proved Reserve Acquisition Costs of $4.74), and Noble Energy (FY 2016 Proved Reserve Acquisition Costs of $5.89) have the cost structures to profit in the face of uncertainty.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
