Think about it: There’s a major aspect of life in today’s world that continues to change dramatically, albeit with relatively little fanfare. No, I’m not referring to health care, the shenanigans emanating from North Korea or the constant contretemps in our nation’s capital.
Rather, I’m pointing to the alterations in global energy circumstances — especially for crude oil and its production and pricing. We needn’t retrace our steps for even a full decade to recreate a picture of crude vastly different from today’s.
You’ll recall that it was under the auspices of an august group operating under the rubric “The Manhattan Project” that in relatively short order developed the atomic bomb in the early 1940s, thereby facilitating an abrupt halt to the ravages of World War II. Many years later, specifically in 2008, I penned a Motley Fool article suggesting the establishment of another Manhattan Project-type of organization. The intent of this one would have been to search for a way to boost our oil and natural gas supplies, which appeared to be waning rapidly.
I was hardly alone in my use of the Manhattan Project metaphor. In early 2009, then Virginia’s U.S. Rep. J. Randy Forbes introduced a bill, “New Manhattan Project for Energy Independence.” Its avowed purpose would have been intensified governmental action toward increasing the availability and use of alternative energy to replace our apparently dwindling fossil fuels cache.
It was during this period that crude prices rose above $140 per barrel for a spell. Supply and demand, you know. Even many energy professionals were figuratively chanting “bye bye, supply.”
But, as luck would have it, this was also the time in which still-controversial hydraulic fracturing was coming into its own. Within just a few years, this process, which largely has been given the moniker “fracking,” had upped oil and gas production from such plays as the Bakken Shale of the Dakotas and Montana, South Texas’s Eagle Ford and the Permian Basin of southwestern Texas and southeastern New Mexico, to name but a few key sites.
Hydraulic fracturing involves a technique wherein hydrocarbon-containing rocks are fractured through the high-pressure injection of occasionally millions of gallons of water and other “proppants” (often sand) into a wellbore. The newly broken rock’s previously trapped crude and natural gas are thereby permitted to escape their prior confinement to become part of our nation’s total hydrocarbon supplies.
As you might suspect, numerous companies have played substantial roles in the maturation of fracking and, as a result, the virtually 180-degree turnabout in our nation’s oil and gas picture. Among those were Mitchell Energy, now a part of Devon Energy (DVN), Chesapeake Energy (CHK), EOG Resources (EOG) and Halliburton Company (HAL).
Today, through the benefits of fracking — there remain those who would dub the process dangerous, rather than beneficial — our nation is virtually awash in fossil fuels. As a result, we’ve moved relatively recently from a voracious importer of crude oil to, effective at the outset of last year, an exporter of both crude and refined products to the likes of Asia, Europe and even Mexico. Concurrently, crude oil prices have plummeted from above $140 a barrel to an almost fitful meandering among various levels in the $40s.
Despite the first crude exports having left U.S. terminals bound for international markets as recently as January 2016, our outgoing volumes continue to expand meaningfully. During the final three months of 2016, U.S. exports averaged about 500,000 barrels daily. More recently that number appears to have risen to about 850,000 per day, and there are those counting as many as 1.3 million daily barrels as we move through the middle of this year.
So while Russia and the OPEC cartel have recently renewed a joint agreement to reduce their combined production by 1.8 million barrels per day, U.S. exports have effectively countered that move, thus keeping prices at their current low levels.
Where do we go from here, and what does this progression portend for your energy investments? The response to the first question is that we’re clearly in a rebalancing period in the global oil markets. While Goldman Sachs believes the balance of risks could carry a somewhat higher price bias through the second half of the year, that’s one opinion that obviously doesn’t constitute a guarantee.
As to sprinkling energy stocks into your portfolio — or maintaining those that have already found their way in — I’d recommend sitting on your wallet vis-a-vis the energy group until the rebalancing mentioned above gains far more clarity than it currently enjoys.
