One of the main story lines for the market is the transformation of global energy production. The energy future is mostly here and now, so one should be looking for and finding opportunities to invest in this unfolding narrative. Part of this story is oil, the black gold that powered the Industrial Revolution and created a motorized world.
I wrote yesterday that Andrew Hall, the iconic oil trader making a huge bet on the future of oil prices, has a thing or two more to consider about the future state of oil in the US. Today, after doing a bit of reading, me thinks he has much more than a “thing or two” to consider about the future of oil prices.
- Shale drilling has boosted U.S. oil output to the highest level since 1986.
Clearly, shale drilling in the US is far from “a dud,” as Mr. Hall stated. And, clearly, one aspect of the transformational global energy story is the increased production of US oil.
- Imports are being pushed out by domestic production that’s risen 65 percent in the past five years, spurred by horizontal drilling and hydraulic fracturing in underground layers of shale rock.
A US less dependent on foreign imports of oil is a US more secure and freer to operate politically and economically in the world. US production of oil is integral to this burgeoning reality, but the ability to refine the oil on US soil is the key to the lessening imports from all other countries, including Canada, which, by the way, is the single largest exporter of oil to the US.
- As refineries turn to lower-priced domestic oil to make fuel at a record pace, the Saudis and other foreign suppliers are left with dwindling slices of the market.
Canada aside, as it is our closest trading partner and not even remotely a threat to our oil supplies or our political state, all the other countries exporting oil to the US, save Saudi Arabia, are rapidly falling by the wayside.
- Shipments are 59 percent below their peak from Mexico, 56 percent from Venezuela and 93 percent from Nigeria.
Even Saudi Arabia is beginning to feel the pinch, and that is where the US is looking to increase its geopolitical influence in the world. If the US can continue to decrease oil imports from the Saudis, the Middle East loses its attraction as a geopolitical magnet. Drawing less oil from the wells of Saudi Arabia means the only reason we need to be in the Middle East is to aid our ally Israel.
- In June, imports from Saudi Arabia accounted for the smallest share of crude processed at U.S. refineries since February 2010.
The above is a start to reducing US dependence on oil from Saudi Arabia and, thus, being able to sublet our apartment in that hot desert where stupid people are killing stupid people and innocent people are dying. As to everyone else, including Canada, the US is well on its way to reducing its independence on all foreign imports.
- Until recent months, the kingdom maintained a steady flow to the U.S. around 1.3 million barrels a day even as total U.S. imports fell by 34 percent from a peak in June 2005.
The above is all good for the market in that reducing the influence of Saudi Arabia, and, thus, the geopolitical influence of the Middle East, reduces the influence threats to oil supplies have on market volatility.
Speaking of supplies … The more important market issue, though, is the US producing and refining more oil for domestic consumption means cheaper gasoline prices on two fronts. First, the US is adding more supply to global inventories. Second it is fundamentally cheaper to produce gasoline in the US because it is fundamentally cheaper to bring the oil to the refineries when the oil comes from North Dakota, Alaska, or the Gulf of Mexico.
Having a stable flow of gasoline at a stable price is a boom for the US consumer, which means the market will benefit as US consumers benefit. Keep in mind we are no longer talking about five years down the road. This shift is happening now and it will only move faster as US production ramps up, which it is.
Andrew Hall might see oil prices at $150 per barrel in five years, but I suspect the market sees lower prices for oil in 6-9 months and a bit beyond that. Consider this: the world is currently experiencing an oil glut. Inventories are peaking and demand is lessening. Even wars in the Middle East, Russia and Ukraine fighting, and sanctions in Iran have not driven the price up. Simply, there is too much oil in the world and the US is bringing in a whole bunch more.
Yes, the big story is the global energy transformation, the movement to alternative forms of energy, but the dramatic story line right now is shale drilling in the US and its impact on global oil supplies. Andrew Hall sees it differently, but, sometimes, even icons make the wrong bet.
Trade in the day; invest in your life …
