Friday, February 28, 2014
If you believe oil prices are due for a correction, you may want to read this first...
Crude oil has had an amazing start to the year. Prices are up 8% and are now trading above the $100-a-barrel mark. Analysts in the media are talking about colder weather and political unrest in the Middle East as temporary reasons for the recent push higher.
But if you take a closer look at oil's global supply and demand, you'll see these triple-digit prices are here to stay.
Let me explain...
Over the past few years, we've seen a massive boom in U.S. oil production. New technologies, like horizontal drilling and fracking, have allowed the U.S. to tap into incredible oil reserves that were unreachable less than a decade ago. I have gotten a close look at these technologies over the last 18 months in the Permian Basin, Eagle Ford, and the Bakken Shale.
These technologies have allowed the U.S. to produce more than 8 million barrels of oil a day. That's the most oil America has produced in over 25 years.
But despite this massive boom, the U.S. isn't even close to producing enough oil to meet current global demand. The world consumes over 92 million barrels of oil per day. The U.S. only produces about 11.5% of global consumption.
This is a big deal.
You see, most of the world (outside the U.S.) is having a tough time finding oil. I'm not suggesting the world is running out of crude. But the cost to produce a barrel of oil outside America is surging.
For example, according to the International Monetary Fund, the breakeven point to produce a barrel of oil in Russia is $110. The breakeven point to produce oil in Iraq, Iran, Algeria, and the United Arab Emirates is $90.
In short, if oil prices fall below $90 a barrel, these countries will not make money producing oil. That could result in a massive amount of supply coming off the market. And if oil prices fall below $80 a barrel, we could see production go offline in places like the Permian Basin and the Bakken Shale – which would further weaken supply.
And contrary to popular opinion, demand for oil is increasing. Many thought the economic slowdown in developed nations and China (the second-largest oil consumer in the world) would cut demand. But the data tell a different story.
China's imports for crude oil jumped 12% in January. That amounts to 6.6 million barrels a day – a record high.
Meanwhile, most of the developed nations are growing again. The U.S. economy is growing at its fastest pace since 2011. Manufacturing in Europe and Japan has been strong over the past few months. And we're seeing record global airplane and car sales. Airbus and Boeing, the two largest airplane manufacturers in the world, said orders are at record highs. And global car sales recently topped 80 million for the first time ever.
Oil prices are moving higher not because of temporary factors like weather and political concerns, but because of rising demand and supply concerns as oil companies have difficulty finding crude oil that's economical.
Unless these trends reverse, oil is likely to average triple-digit prices over the next few years. In other words, I would think twice before betting on a huge correction in oil prices.
Oil exploration-and-production companies are spending billions of dollars to find more oil. And oil-services companies are profiting from this massive spending spree. Learn which "nuts and bolts" oil plays Frank recommends here:
Huge Profits Ahead for This Dirt-Cheap Energy Giant
"This company is expected to grow its earnings 30% annually over the next two years. That's about four times faster than the overall market."
Four Stocks for the Global Shale Boom
"Oil-services stocks have pushed sharply higher. But it's not too late to make a lot of money on this trend..."