The U.S. Oil Boom

Despite falling oil prices, the United States is in the midst of an oil production boom. Driven by hydraulic fracturing and new shale technologies, domestic production has reached 8.7 million barrels per day. This volume is a substantial share of the global output of about 90 million barrels per day. The United States is a leader in many product categories such as diesel products and gasoline. More importantly to the prices of stocks and bonds, the U.S. boom has lowered prices and increased global supplies.

Oil Stocks Follow the Action

Oil stocks and oil-based investment indexes can follow the remarkable patterns of oil prices and supplies. Monitored daily by millions of investors, oil data indicates the pulse of the economy. Investors can involve oil in their portfolios in many ways. They can invest in oil company issues, oil futures, and indexed investment funds that feature oil issues such as mutual funds. Currently, oil prices are down, and as a result, oil stocks have fallen.

Production Has Momentum

Despite falling prices, expansion of oil and energy production will continue at a robust pace in the United States. Although prices have fallen by $10 per barrel in recent months, the existing investment in production will proceed. Prices may continue to fall, and demand may remain soft, experts predict that an additional decline of $10-15 per barrel would likely not diminish the production trend. U.S. production rose by one million barrels per day over the past year.

News and Events

Crude oil prices are vulnerable to news and events. They can rise on political decisions, outbreaks of armed conflict, and rumors of change. Russia’s involvement in conflict in Ukraine has caused a series of international sanctions. The west targeted Russia’s banking and oil sectors with long-term credit bans. Conflict has interrupted supplies from Iraq. In the EU, there are wide-spread signs of economic slow-downs due to fiscal austerity policies. Stocks and bonds related to oil prices are also vulnerable to news and events.

The Current Situation

There is lower global demand for crude, and the markets have large supplies. Prices have fallen to recent historic lows in the range of $82.50 per barrel. Consumers benefit from low prices for crude oil. Gasoline prices have fallen to three–year lows in the United States. The American Automobile Association reports that nearly a third of U.S. gas stations priced gasoline under $3.00 per gallon in recent weeks. Another factor is greater energy efficiency; better use of energy has reduced demand for crude oil.

Low Prices but Substantial Profits

Looking inside the production numbers, the investor will easily see that falling prices will lower profits. On huge volumes of crude, smaller margins may still yield substantial returns for producers. The Department of Energy reports that less than four percent of shale production in Texas, North Dakota and other states require a break-even point above $80 per barrel. The International Energy Agency estimates that less than three percent of the global production of 90 million barrels requires a break-even point above $80.00 per barrel.

Market and Non-Market Influences

Higher prices benefit oil companies; they are among the wealthiest in the world. Investors must remember that higher energy prices have structural momentum based on strategic interests of oil producing nations. As a primary source of revenues, oil pays for education, food, and housing. These programs require current and long-term sources of revenue. Higher prices for crude deliver both the immediate needs and a formula for future revenue growth.

The Near-Term Forecast

Based on current production trends, large supplies and lower prices may persist into 2015. Should an oversupply remain, one might expect to see production pullbacks, but they will likely first take the form of cutting low-production sites. Oil stock prices tend to follow the market, and one can expect stocks to stabilize then move upward in the New Year. Stocks may advance sharply as demand reduces market surpluses and leads to a new round of production increases.

Long-term Projections

The long-term effects of low crude prices will be a glut. Desperate governments would make up for lost revenues by underselling the market. As desirable as this might seem to consumers, governments rely on oil revenues and have strong incentives to cooperate to stabilize price and supplies. Since the 1970’s Arab Oil Embargo, the U.S. has maintained a ban on exports of petroleum fuels. With current supplies and prospects for increased U.S. production, many industry leaders advocate removing the ban and permitting broader exports. Exporting is a topic with potential future impact on oil stocks.

U.S. Department of Energy
International Energy Agency
US Energy Information Association