Where Will Future Oil Production Come From and How Can Investors Profit Today, Part 2
May 23rd, 2008 | By Dan Denning | Category: Oil Investment & Alternative EnergyFor example, earlier last week Italy’s Eni reported a two-year delay in beginning Phase one production at the Kashagan field. It’s the fourth postponement on Kashgan’s production date and shows you how even a large oil find (Kashagan was the world’s largest in 30 years at the time it was discovered in 2000) can be years away from alleviating current demand.
When you add up all the projects together, you’ll find that 48% of expected new production volume comes from just five companies—ExxonMobil, BP, Royal Dutch Shell, TOTAL, and Chevron. When you throw in the three large NOCs I mentioned earlier—Petrobras, Gazprom, and Aramco—a full 70% of production already in the pipeline will come from just eight companies.
That doesn’t leave the investor much to choose from. You can’t even invest in Aramco. Though you can invest in Gazprom, we wouldn’t recommend it. The other six companies on the list are already household names. So what are you left with?
Global Oil Services and an ETF
You can be sure that if global oil production is to expand at all in the next five years, oil services companies are going to play a role. There are not a lot of well-kept secrets in the oil services field, either.
The UBS report tips two firms, Halliburton (HAL) and Norway’s Petroleum Geo-Services ASA (PGS). It’s worth noting that PGS just won its biggest contract ever, a US$200 million award from Petrobras to high-density, four-dimensional marine seismic survey work in Brazil’s Santos, Campos, and Espirito Santo Basins.
Other firms in the oil service sector include: Baker Hughes, Intl. (BHI), Diamond Offshore Drilling (DO), Nabors Industries (NBR), National Oilwell Varco (NOV), Noble Corporation (NE), Schlumberger (SLB), Smith Intl. (SII), and Transocean (RIG).
You could buy any one of them, a combination, or simpler still, all of them at once via the Oil Services ETF, OIH.
As the chart below shows, OIH’s rise since 2004 has been steady and impressive. A correction in crude oil prices might bring OIH back down to around 180, a price where the share seems to have long-term support (unless the trend is reversed, in which case oil will go much lower and the global economy will likely be in recession.)
In the last year, crude oil has smashed OIH head to head, with crude doubling and OIH up a mere 29%. The crude oil ETF, the United States Oil Fund (USO:AMEX) has tracked the price of crude and, should crude go higher, is a good bet to follow it up even more. Conversely, USO will get clobbered if oil corrects (making it an intriguing speculation for options traders who could buy puts on it.)
Since USO’s inception in April of 2006, OIH had actually outperformed it until oil’s most recent mad dash. If a short-term correction in the oil price looms—as UBS expects—but a long-term bull is a near certainty, then it might be a good time pick up shares in OIH and benefit from oil’s next big move up.
Politics, Pricing, and Physics
A buy in OIH assumes that oil prices are headed up. Your risk, as a bull, is that oil’s next big move is down, not up. And we should explore that in closing. In the midst of the euphoria over higher energy prices, there are some real risks. We’ve identified three of them.
- Nationalisation of oil projects currently held by public companies
- A new pricing mechanism for crude oil
- The collapse of our complex society
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More on this topic (What's this?)CNBC: Boone Pickens on Oil (Blogging the Commodity Bull Market, 5/21/08)Why Crude Oil Will Present Investors with a Golden Opportunity in 2009 (Money Morning, 12/29/08)An Army of Forces Lifts Oil Prices (Jim Kingsdale's Energy Investmen..., 5/22/08)
Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.