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Profiting From the Shale Band

Written by Keith Kohl
Posted February 12, 2020

So you can’t make any money in oil and gas anymore?

When Jim Cramer said that, I imagine that quite a few investors nodded their heads in agreement.

Those people were also the same ones who waited until oil topped $100 before they got their feet wet.

They were also the first to buy shares of Tesla at $968.99 apiece.

Let’s see how that trade works out for them.

But we can see why he took the most bearish sentiment possible, right? He said it wasn’t personal opinion or political, but rather economical.

And after watching crude prices plummet more than 23% over the last four weeks, nobody can blame him.

Blood is spilling freely into the streets right now, and you know just as well as I do that this isn’t the time to panic… because the opportunities are just starting to show themselves.

Let the investment herd keep waiting to buy Tesla at $1,000.

We’ll be too busy making money in oil and gas.

Here’s why…

Shale Band Profit Potential

Fortunes have been built on the two most profitable words in oil: shale band.

I hinted at this a little bit last week when we talked about the low-price environment we’re in right now.

Coined by Olivier Jakob back in the spring of 2015, the shale band is the price range that can support U.S. tight oil. When we are at the top end of the range, drillers will open the taps and extract crude at a frenzied pace. Conversely, companies hit the brakes at the low end of the price range.

It’s a simple concept.

When the shale band was first brought about five years ago, the range was set between $45 and $65 per barrel.

That range is a bit lower now thanks to companies becoming more and more efficient every time a well is drilled.

With crude struggling to stay above $50 per barrel, drillers are getting conservative… which makes sense.

Right now, U.S. oil output stands at 13 million barrels per day according to the Energy Information Administration.

That’s over 4 million barrels per day more than we were producing at the beginning of 2017!

In late 2018, crude prices quickly rose above the top end of the shale band to around $76 per barrel, and it wasn’t long before they fell back into the range last year.

Given the geopolitical storm that raged during the second half of 2019, we were well on our way to the top of the band.

And that, dear reader, directly leads us to the catalyst that not only sparked oil’s latest price decline but is opening the door wide for investors.

Although production growth from U.S. tight oil has been the main concern regarding oversupply, what we’re seeing now is nothing short of a true black swan event.

The demand destruction is taking place due to the coronavirus.

The worst part about this outbreak is that most — if not all — of it is pure speculation.

Whenever the Chinese government releases news regarding the severity of this event, we can’t help but take it with a grain of salt. If you’ve seen the footage coming directly from the streets of Wuhan, it tells an entirely different story.

Naturally, this has everyone confused and scrambling to make the right call.

Some reports have China’s demand drop pegged at 3 million barrels per day; others suggest the decline isn’t nearly as bad, only 450,000 bbls/d.

Now, the real question is how long this situation will last.

Things can get worse over the short term.

The latest support this morning is stemming from news that Russia is studying the recommendation from OPEC+ that the demand destruction caused by the coronavirus warrants a fresh 600,000 bbls/d cut on top of the 1.7 million bbls/d of production curtailments that were already agreed upon.

Don’t hold your breath.

Any cut wouldn’t come until the next OPEC+ meeting, and even the Chinese government can’t keep a lid on this real situation for that long.

That brings us back to the blood that is flowing in the oil markets.

My readers and I love these opportunities, and it’s the time when we find our biggest winners.

Finding those tight oil stocks that can turn a profit when crude is this low is one thing, but the real secret to a winning oil investment is finding the few companies that can grow production without taking on more debt.

Although we may not have seen the bottom just yet, crude prices will make their way higher once the market is convinced we’ve moved past this epidemic.

Now is the time to search out those cheap hidden gems in oil.

Until next time,

Keith Kohl Signature

Keith Kohl

follow basic@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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