Drilling the Williston Basin
The One Oil Investment to Make Before Prices Rebound
At least, this was the advice offered to me when oil prices started declining late last week.
Usually, I tend to agree with this sentiment. Certainly OPEC's ability to take oil off the market shouldn't be overlooked. After all, its members are still lowering output by 4.2 million bbls/day, based on two cuts during the latter half of 2008.
This time, however, I'm not too inclined to focus all of my attention on the OPEC. Yes, they do have another opportunity to cut production further when the organization meets on May 28. But the story of oil's recent decline is more likely due to the latest strength of the dollar.
Add to that another weekly build in U.S. crude oil stocks and more bad news for the global economy, and lower oil prices will inevitably fall. If you recall, on Wednesday, the EIA reported a build of 3.3 million barrels to inventory levels. That means levels are 44.8 million barrels higher compared to a year ago.
Sure, it's easy to get nervous when oil loses its rally. Last week, prices were pushed over $54 per barrel. However, oil prices falling as low as $48.11 per barrel today shouldn't cause us to lose sight of what's ahead.
But before I go any further, I think it's important to go over some of the reasons why we might be in trouble.
The Backside of Peak Oil
Late last week, several readers had me worried.
They've unfortunately lost perspective on the future of U.S. oil production. The fact is U.S. oil production peaked more than 39 years ago in 1970.
I'm not just talking about a slight decline.
However, I feel its important for you to see this for yourself. Based on the statistics from the Energy Information Administration, the U.S. pumped out more than 9.6 million barrels of oil per day in 1970. In 2007, production barely averaged over 5 million barrels a day. As you can see, we briefly managed to keep production at a plateau before falling down the backside of the peak.
And if you really want to crunch the numbers, the news is even more grim. In 2008, our production averaged 4.95 million barrels per day. We haven't seen a yearly production average under 5 million barrels since 1946.
Now let's take into account oil's price run to $147 per barrel over the last decade. Even despite all the increased drilling and investments made due to inflated prices, we still failed to increase production.
Take a moment to think about that.
I think we're beyond wishing production would recover. With the loss of investments and decrease in drilling due to low crude prices, how can you not see the storm that's brewing?
The problem is things aren't looking better for anyone else.
Putting it All Together
Over the last several weeks, there have been several reasons why we should be concerned with our future oil imports. I wish I could sit here and say everything is going to be okay.
And although many of you have shared those same worries, that's not enough. In fact, I think it's just as worrisome that too many people (some of whom are investors) simply don't get it.
Within the next five years, more people will be waking up to the reality of peak oil if they haven't already.
Considering U.S. crude production's spiraling down the drain, the question is how our other sources of oil are faring these days. You've probably noticed many of those import problems on the pages of Energy and Capital recently.
Things aren't so rosy when you look at our top sources for oil:
Canada: As our largest source for oil, Canada was hit hard when oil prices tumbled more than 70% from $147 per barrel. More and more projects are delayed as low prices continue.
Saudi Arabia: Despite their super-giant oil field, Ghawar, being in decline, the undisputed king of OPEC is one of the few members content with oil at $50 per barrel.
Mexico: The loss of the Cantarell field will have serious repercussions for our third-largest source of oil. And as my colleague Chris Nelder pointed out a few weeks ago, Mexico's troubles are our troubles, I couldn't agree more.
Although I only mentioned our three largest sources of oil, the list doesn't get much better. Rounding out the 4th and 5th spots on that list are Venezuela and Nigeria. Again, lower crude prices will make it extremely difficult to develop Venezuela's heavy oil deposits. I am confident my readers understand the volatility associated with Nigeria. The thought of working on a rig over there makes me shiver.
Drilling the Williston Basin
So where does that leave us?
I'll admit it's difficult to get behind our domestic production. Despite the doom and gloom that dominates most U.S. production outlooks, there is one shining star on the horizon.
Stretching across North Dakota, Montana, South Dakota, and southern Saskatchewan is the Williston Basin. And as many of you are aware, the Williston Basin is home to the Bakken formation. Unlike many other areas in the U.S., the Bakken still has quite a bit of potential. In fact, it's one of the few areas where production is actually expected to increase.
Don't get me wrong, dear reader. This deposit isn't going to save the U.S. from peak oil. It's not the panacea for U.S. production.
If oil is able to find support and remain over $50, the solid players in the Williston Basin will prove extremely profitable for investors. Like the rest of the industry, you can still pick up many of the good drillers at an extreme discount. The good part is that it's not just U.S. companies getting in on the action. Stay tuned because next week I'll show you some of my favorite plays operating on the other side of the Bakken.
Until next time,
P.S. The way I see it, there are two types of investors during a financial crisis. Either you're the kind who loses his shirt through panic selling, or you take advantage of the chaos and profit. I know which category my readers and I fall into, but it wouldn't be fair if I didn't offer you the same chance.
You see, the Pure Energy Trader was designed to make sure your energy investments come through this economic turmoil unscathed. My colleague, Ian Cooper, is on the verge of picking up another round of profits. If you're interested, I suggest checking out the Pure Energy Trader for yourself.