The Bakken Oil Play

Keith Kohl

Written By Keith Kohl

Posted February 2, 2009

You’ve probably seen them barreling down the highway recently: mammoth vehicles that were thought to have been extinct, especially once gasoline broke over $4 per gallon.

I know my short-term memory is bit fuzzy at times, usually it depends how early it is in the day…

Judging from what I see around me every day, I know I’m not the only one.

Over the weekend, for example, I was stunned for a solid twenty minutes by one massive SUV. The gentleman before me was trying to squeeze it into a space more suited for a VW.

The cars to the left and the right were right on the line, giving him no room for error. I wasn’t the only one enthralled by the scene. I quickly noticed a lady behind me, shaking her head. I wanted to stay optimistic and soon put down $20 on the SUV sliding in perfectly. Now fast forward twenty minutes later to one long scratch down the side of a pleasant-looking sedan.

In the end, the lady next to me had won a free tank of gas, courtesy of my wallet. Regardless, the question at hand was, "Why on earth is he still driving this beast of vehicle?"

Apparently, his memory is much worse than mine.

Turn Your Clocks Back Three Years

I’ve heard many things during my life that have put me into a fit of laughter, the most recent being that cheap oil is here to stay.

I can’t blame someone for thinking that way at first. The truth is that we haven’t seen oil this cheap since 2005. That’s about as close as you’ll get to time travel, dear reader, no flux capacitor required.

Lately, it has felt like there’s no rescue in sight for oil prices: the economy isn’t out of the deep end just yet, demand is driving down, gasoline consumption is falling as people are driving less.

Let’s take a quick look at the EIA numbers from last week. Demand for finished motor gasoline is down by almost 300,000 barrels per day compared to last year. The price of gasoline has fallen more than 38% from a year ago.

U.S. crude stockpiles have been rising week after week. Our inventory levels are 45 million barrels over last year’s levels. On top of that stockpile buildup, spot prices are half of what they were last year.

In the past, the mere thought of cutting supply would spike crude prices. Even after two big OPEC cuts, prices merely shrugged and dropped to $32 per barrel. Over the next few months, you can bet there will be more production cuts, more projects delayed and more volatility to come.

As expected, the crash in oil prices has led to a massive decrease in activity. The IEA announced recently that about $100 billion in projects have been delayed or even canceled. Furthermore, world oil demand is projected to fall between 300,000 and 400,000 barrels per day this year.

Despite the sour outlook for most of 2009, there are still a few places I would count on for long-term growth. In fact, there’s one specific place where oil production actually increased as oil prices crashed.

The Bakken Oil Play

There’s no doubt that the Bakken has staying power.

Many of my readers have been following the Bakken formation for a few years. Unfortunately, nothing is immune to this recession. The number of active rigs drilling in North Dakota has dropped slightly over the last three months.

Last week, the EIA highlighted the changes in proved oil reserves in 2007. At first glance, over half of the areas experienced a net loss in proved reserves, including a drop of 191 million barrels in the Federal waters off the Gulf of Mexico.

Interestingly, there are only three areas where proved reserves jumped: Alaska, Texas and North Dakota. Granted, the first two states should be expected to lead the pack. It turns out that North Dakota had the third largest net increase in proved reserves that year, a 17% jump over 2006.

Only one of those three states, however, has increased production during the last seven years—North Dakota. We can thank the Bakken play later for North Dakota’s success.

While the U.S. pushes for energy independence from foreign oil, I think it’s safe to assume part of that will come from developing the Bakken. Despite the economic troubles, the Bakken is on the top of my list for long-term growth.

Down, but Not Down for the Count

So is the worst over?

Depending on whom you’re listening to, oil will either plummet to under $20 per barrel or finally stabilize above $60 per barrel.

Either way, there is one thing for sure: you’re not going to get a better buying opportunity than right now. In today’s market, I’m looking for those those solid, but unfairly beaten down, companies that will inevitably rise from their ashes once the global economy gets back on its feet. Next week, I’ll tell exactly which plays are too good to ignore.

Until next time,

keith kohl

Keith Kohl

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