Is Cheap American Oil the Future?

Despite escalating violence in the Middle East, the price of oil is down in early afternoon trading on Thursday. WTI crude for December delivery dropped 1.5 percent to $85.01 per barrel, while Brent crude dropped 0.78 percent to $107.63 per barrel just before 1:00 pm.

Energy prices are being tugged at from every angle. The Energy Information Association reported on Thursday that U.S. crude oil imports averaged 8.2 million barrels per day over the last four weeks, 721,000 lower than the average for this time last year, while inventories rose “well above the upper limit of the average range for this time of year” to 375.9 million barrels, according to the report.

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Declining imports and climbing inventories coupled with low prices create an entirely unclear picture of the energy market. Oil has been bouncing between $84 and $88 per barrel for a while, as the United States Oil Fund (NYSEARCA:USO) has been scraping along a bottom near $30 since crashing from triple-digit highs in 2008. While geopolitical fears rear their head every once in a while and cause the price to wobble, the price of oil is expected to remain low for the foreseeable future.

The IEA cut its forecast for global oil demand in the fourth quarter by 290,000 barrels per day, to 90.1 million bpd, while global supply is expected to come in around 90.9 million bpd. To complicate predictions about the future of the oil industry, the IEA expects that America will become the world leader in production by 2020 thanks to shale oil and gas reserves now accessible through hydraulic fracturing and horizontal drilling.

If this is true, geopolitical tension in the Middle East will play less of a roll in oil prices as disruption to any supply from the region will decreasingly affect the United States. Politically tame compared to the Middle East, an America that leads in oil production could have a stabilizing effect on oil prices.

Supermajors like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) will try to capitalize on this shift in the market with more aggressive shale oil and gas plays. Despite low prices, the industry is looking at intermediate-term growth with energy demand expected to rise 30 percent through 2035, and oil use expected to climb 0.7 percent per year. While oil consumption in OECD nations is projected to remain flat or decline, stabilization in the global economy should see a surge in exports to power-hungry nations like China and India.

Removing the cloud of foreign oil dependency from over America’s head will be a hugely important shift. Not only will the markets have to adjust, but the entire political architecture surrounding oil will change.

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