Spot oil prices have surged nearly $15 for West Texas Intermediate (WTI) crude over the past few weeks. Technically, the recent rise presents a bullish formation for WTI (Figure 1.1) that suggests a challenge over the remainder of 2013 toward the post-2008 crisis highs of $114.83 in May 2011 and $110.55 in March 2012.
Of course, as always is the case when oil prices advance this quickly, the finger of blame is pointed at others. Whether evil speculators or turmoil in Egypt, a nation that produces roughly 600,000 barrels of oil per day, and the structural energy challenges we face, never get addressed.
In the wake of the 2008 credit crisis, the incentive to increase oil production or invest in energy infrastructure remains limited. Antiquated oil fields litter the globe, whether in Alaska, Norway, or the North Sea region. Yes, the unrest in Egypt is increasing demand for the paper asset of oil in the near term. But investors should be more focused on the challenged global supply of oil. Currently, the evidence presented suggests a far more concerning supply/demand balance than is being reported.
As growth expectations are being elevated, here in the United States in particular, demand is quietly surprising to the upside.
- U.S. refineries are currently operating at 92% capacity (Figure 1.2), their highest level of the year, to meet rising U.S. gasoline demand
- U.S. gasoline demand rose 1.8% last week to increase the 4-week moving average to 9.08 million barrels per day, the highest level in 11 months
- U.S. oil inventories (Figure 1.3) have fallen nearly 25 million barrels since late May
- Globally, surprisingly strong oil demand from Brazil is more than offsetting the demand slowdown from China
- China’s 3-month year-on-year demand growth is +231,000 barrels per day, or +2.5%
- Brazil’s 3-month year-on-year demand growth is +248,000 barrels per day, or +11.7%
For those reading this blog, the immediate counter-argument question would be “What about the blessing of U.S. shale?” Yes, the “blessing of U.S. shale” is real and will contribute to the U.S. importing less oil and improving the fiscal deficit. That becomes the investment opportunity. Energy investments in portfolios should center on maximizing opportunities directly from U.S. shale plays. Any improvement in the global supply/demand balance will come from U.S. production, not OPEC. In fact for the month of June, OPEC production fell 227,000 barrels per day from May.
It is very easy to casually place blame for the rise in oil prices. However, truly researching the evidence highlights a larger energy infrastructure challenge that is amplified as growth expectations rise. There is a secular investment opportunity currently presenting itself in energy. Energy corporations within the S&P 500® Index (SPX) have had both 2013 and 2014 earnings-per-share revisions of at least -1% during the second quarter. Sales revisions during the second quarter were -3.5% for 2013 and nearly -8% for 2014. Demand is rising; the spot price of oil is highlighting that. The supply shortfall will come from U.S. shale. Currently, secular energy investments in U.S. shale plays should be strongly considered.
Figure 1.1 Spot Oil, 2009 to Present
Figure 1.2 U.S. Refinery Utilization Rate 2013
Figure 1.3 U.S. Oil Inventories 2013