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Why the Oil of the Permian Could be the Next Elephant Oilfield

There’s no law in the market that oil and gold have to move together. But when they begin to diverge in a big way, like now, it pays to wonder why. Maybe BHP has the answer. It’s put Texas tea on the drinks menu, at the top of the list. So today’s Daily Reckoning will journey across the Pacific to visit the great American energy boom looking for answers.

Actually, it’s wrong to suggest all the energy action in North America is in Texas. The new drilling technology is unlocking supply from Canada to North Dakota to the Atlantic states.

To get an idea of the North American energy boom, check this out: 2012 saw the largest growth in oil production in US history. That’s according to the June release of the BP Statistical Review of World Energy. The oil biz in the US goes all the way back to Colonel Drake in 1859.

To be clear, BP is looking at the figures from 2012. But stepping back from the day to day data and news is probably more fruitful for tracking the big trends.

Here’s a curious point: on a net basis last year, the oil market didn’t change that much in 2012. Growth was a pretty meagre 1.3%. But in a regional sense, it’s no exaggeration to say the oil market is being completely remade, or in the spirit of Joan Rivers, ‘reworked’.

A Visual Metaphor For the Oil Market?


Source: Google

You can boil it down to this: US net imports have fallen 36% from their 2005 high. Meanwhile, China accounts for 86% of the growth in net imports in the same period. That’s huge. While North America drives the supply boom, China revs the demand.

But the thing that jumped out at us from this report is the fact that oil is actually losing market share. That’s as a percentage of global energy consumption. It’s at 33.1% and in the 13th consecutive year of decline. 

Why that jumped out at us is because nobody seems to be telling the oil traders. The West Texas benchmark hit a 12 month high during the week. 

Oil on the Up


Source: StockCharts

Do they know something we don’t?

For now, that rising chart looks very lucrative if you happen to be a shareholder in a company operating in the energy business. As we said, one of those happens to be BHP.

They told investors at the Global Metals, Mining and Steel Conference a few months back that a US$1 move in the oil price moves their net profit by 45 million either way. The only commodity with a bigger impact on the bottom line is iron ore. 

The brass at BHP maintains that the outlook for iron ore is more robust than the market expects. But they have a pretty handy hedge by having a foot well and truly in the door of the oil and gas industry in the USA.

There’s a kind of tussle between the spreading chaos in the Middle East and other oil producing countries against the uplift in production from North America. There might be a big premium to be had for good reserves in countries that are outside the possible danger zones.  

That’s an idea Dan Denning over at The Denning Report  says is worth following. That’s largely what he’s positioned his readers for. Norway, USA and Australia look a lot less risky and a whole lot more lucrative than Venezuela, Iran or the Sudan when it comes to speculating in energy on higher oil prices. 

Of course, you need to have the reserves in place to capitalise if oil does go higher. For BHP, the most exciting prospect today is in the South Midland section of the ancient Permian basin in West Texas.

Apparently it’s no exaggeration to say this might be the biggest oilfield after Ghawar, Saudi Arabia. Ghawar has been producing for decades – the biggest ‘elephant’ oilfield of all time. 

You probably already know that the Permian basin can’t replicate the cost base of Saudi Arabia. The oil of the Permian is very deep plus hard and expensive to access. But it makes up for it in possible size. It’s estimated to be 50 billion barrels. It could be triple that. Nobody knows for sure.

According to the International Energy Institute, the world currently uses 89 million barrels a day. That’s 32 billion barrels a year. So the Permian could have over one year of global supply, at least.

That’s the industry aspect of it. The geopolitical side is even more intriguing. Take this from the Australian Financial Review on Tuesday:

‘[Oil production from the Permian basin] would speed America on its path to topple Saudi Arabia as the largest oil producer, slash US imports, mute price spikes from Middle East unrest and even make substantial US oil exports feasible.’

That’s pretty high stakes in anyone’s books. That reminds us of something rogue economist Phil Anderson said in his Remembering the Future presentation: lower energy costs thanks to North America (if the Middle East can stay stable) could allow Ben Bernanke to get away with prodigious money printing. Phil argued deflation in energy costs will nullify the inflation of the US money supply. There seems to be some big assumptions in THAT argument.

We suppose there usually is in any investing case. For now, it’s telling that the world’s largest diversified miner has made oil and gas one of its four major pillars. It might pay for investors to think on similar lines.

Regards,

Callum Newman
for The Daily Reckoning Australia

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ALSO THIS WEEK in The Daily Reckoning Australia

A Two-Faced Shock for the Australian Economy
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Falling US bond prices are the prime mover in markets right now. As bond prices fall, yields rise. The investment implications multiply. There’s one simple way to view rising US rates: it signals the official end of the global credit expansion underway since the early 1970s. That may not sound simple. But it is when you break it down. So let’s break it down.

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Why Natural Gas Could Save Us From an Impending Energy Crisis
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You’ll open your electricity bill and see that it’s double or even triple what you normally pay. There won’t be any good reason for it. It won’t be because you’ve used more power, or because someone’s running a dance club out of your living room while you’re away at work. It will be the result of specific failures to avert a perfectly predictable crisis.

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It’s both a tragedy and a story of heroism and cool-headed action under pressure. But what has received little attention so far is the number of innovative materials in the Boeing 777 that helped so many of its passengers survive. Almost all of that advanced technology came from defence research, which leads us to today’s topic.

Callum Newman

Callum Newman

Callum is the feature editor for The Daily Reckoning — Weekend Edition. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors. To follow Callum's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. More on Callum Newman...
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1 Comment

  1. Ross says:

    If a guy remembers my literary device rather than imagines it for himself we are sure to see some notable miss hits.

    “lower energy costs thanks to North America (if the Middle East can stay stable) could allow Ben Bernanke to get away with prodigious money printing.”

    …this supposes that Ben’s liquidity has averted debt deflation and deflationary expectations. If new housing starts being down 15% as “investors with smoke for collateral” flood repossessed housing markets with liquidity isn’t enough for you then try UPS :

    http://www.bloomberg.com/news/2013-07-12/ups-cuts-2013-earnings-forecast-on-u-s-economic-slowdown.html

    UPS has been raising prices in the order of 6% year over year continuously for years even as oil prices fell and GDP languished. Their story today is that customers are switching from high oil burning premium air services to lower oil burning rail backbone economy ground services which is yet another layer over the stagflationary volume drops and rising prices which creates a 70′s style stagflationary loop while having falling rather than rising oil prices.

    Meanwhile Wall St survives Boeing’s Dreamliner spontaneously combusting on the ground at Heathrow and the UPS 5% slide on lowered revenue forecasts ….. BUT …. the AUD hits new lows. The plunge protection team appears not to be having the same pull with the bond markets. That dichotomy is the story of the day.

    The F16′s are still going to Egypt for Boeing despite US law though. The White House not calling black white on any given day would be the shocker in the progressive manifest destiny era.

    Meanwhile guys, when was the last time a desperate nation state couldn’t find a banker to finance a war?

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