Oil and gas had a strong run throughout 2017, with crude oil production climbing sharply, especially in the US. In the first 3 quarters of 2017 US oil production grew by 650,000 barrels per day (b/d), and by year end the OPEC Reference Basket grew by about 29%, with the ICE Brent and NYMEX WTI showing gains of their own. The US Energy Information Administration (EIA) also shifted expectations going into 2018, saying that US production of crude oil will come to hit the highest levels for any year ever recorded. These expectations moved from an anticipated 9.95 million b/d to 10.02 million b/d. A majority of the growth in US production has stemmed from shale operations that continue to expand, thanks mainly to rapid technology advancements. However, these advancements have led the EIA to stress the uncertainty of their projections due to the nature of tight oil and shale gas, stating that the present level of resources in the current plays are not well known and that decline in technology advancement could hurt production estimates.
Figure 1. U.S. Field Production of Crude Oil
Despite these possible concerns, global oil demand was robust and rose in 2017 by about 1.57 mb/d, ending the year overall at an approximate 96.99 mb/d. Already this figure has risen since lasts year’s end to sit at about 97.07 mb/d, and forward expectations have revised that by 4th quarter’s end total world oil demand will reach upwards of 98.70 mb/d. Much of this growth owes itself to tight oil and shale gas which accounted for 55% of oil and 54% of natural gas production in the US for 2017, which is sizably more than the 17% that each accounted for in 2008. American refineries are also pushing up the limits of their operable capacity, hitting 93.5% as of the week of April 6th. On top of the growth in production, oil prices are sitting around a 4 year high of $67 per barrel, and growth does not appear to be slowing.
Figure 2. U.S. Crude Oil and Dry Natrual Gas Production
There is a continuing shift towards demand for non-OPEC supply of liquid fuels, as seen in Fig 4. Again, this shift is predominantly forming due to continued growth in US tight oil and Canadian oil sands production which has sustained a steady climb since 2013. The sentiment across the board is that production will continue to rise. This is coupled with continued economic growth, which has been pushed further by high demand in industrial and transportation sectors, which is a good sign that a growing supply will be matched with growth in demand. With the EIA’s warnings about uncertain levels of shale resources and possible slowing of technological advancement in mind, it would be wise for an investor to ensure that their portfolio is diversified across the energy sector. This is on top of ensuring diversification against political and geological risks. Yet much of the risk associated with these later factors disappear when one looks to invest in non-OECD countries.
Figure 3. Oil Production by Region
Figure 4. Projected non-OPEC Liquid Fuel Production
Looming overhead is the continued threat of trade sanctions on China from the US. This has further devolved into a possible tit-for-tat battle, and such a trade war has continued to be an unfortunate possibility for global economic growth. It will be important to keep an eye on the outcome of discussions between the US and China in the near future, as slowed global progress could see a decline in demand of oil and gas. The concerns over these risks have been dissipating however, and with growth continuing to be revised higher it may appear to be good time to invest. However, it is important to note that even with signs pointing to strong numbers in US exports abroad into 2018, especially coming from 2017 in which liquid natural gas exports quadrupled (Figure 5), there have been oil inventory drawdowns over the past several months in the US. Moreover, even with the shale oil boom mounting huge production figures, many companies have struggled over the last several years to turn a profit, and many investors have pressured US shale oil companies to increase dividends or have otherwise pulled investments. The fundamental problem has been in high costs associated with extracting shale oil, but this may come to change in 2018 thanks to improved production and higher volumes for similar costs. Such shifts may finally see investors coming back if quarterly results can finally post positive profits.
Figure 5. U.S. Exports of Liquefied Natrual Gas
With the above factors in mind, my suggestion would be to invest into US natural gas and crude oil pipeline companies. These corporations are perhaps a safer bet at the moment due to the question of whether or not crude oil prices can be sustained at its current levels. If this were the case, then it may be time to put money back into shale oil producing companies, but as of yet we do not know if these companies can finally push above costs and beat expectations. Pipelines are not as sensitive to changes in price, especially since lower oil prices see pipeline usage rise since it is cheaper to transport as compared to transportation by train. The boom in supply has also been pushing capacities of existing networks further. In Texas there has been a sharp increase in demand for truck drivers to match the rising production, with companies offering up to $100,000 base pay to drivers, and there maintains a shortage of available workers. What cannot find its way onto trucks then will surely find themselves onto trains or into pipelines. With companies needing to cut costs to bolster profits, pipelines have become more and more attractive. My stock pick for 2018 then is Enterprise Products Partners (EPD). This company is a natural gas and crude oil pipeline company with a ~$56B mkt cap. Its operations include 50,000 miles of pipeline, storage and natural gas processing facilities, and also 18 ship terminals for loading oil and gas products. EPD, like many other companies, slightly missed earnings in the 2nd and 3rd quarter of last year due to Hurricane Harvey. In 4th quarter of 2017, EDP also began limited service on their pipeline from the Permian Basin to their Houston refinery. As seen in figure 3, the Permian Basin is the largest oil production field in the US, and among the biggest in the world. EPD has for many years hosted the status of maintaining consistent growth, though it faced a severe sell off in 2014. With world demand for oil only looking to rise and US oil production hitting record numbers, it is likely that EPD will be looking to grow over the next coming quarters.