America’s oil sword is rattling

If I had told you in the middle of the oil embargo in 1973 that the U.S. would soon be a bigger oil exporter than OPEC countries Libya, Qatar, Ecuador and Gabon combined, would you have believed me?

No, you would have asked me where Gabon was… and then locked me up in the looney bin.

But that’s where we are. I have talked about this in the past few months, but now it looks like after all the mergers and acquisitions and all the losses, the U.S. energy patch is officially back in business.

Add to that Spanish oil-giant Repsol’s recent announcement that they have found an “elephant find” — 1.2 billion gallons of oil reserves in Alaska. It’s the biggest U.S. discovery in more than 30 years.

The combination of these events has finally driven oil prices out of their $50-55 per barrel range and dropped it to sub-$50 again.

This has flummoxed the Saudis — who just cut production in January to raise prices — and the Russians are not too pleased either.

Maybe that’s because things are not as bad between the U.S. and its neighbors are you’ve been led to believe? After all, according to the Energy Information Agency, 22 percent of our oil exports goes to Mexico, our largest customer. Another 13 percent goes to our northern neighbor, Canada.

Lower prices, rising exports

As I discussed in a previous article on oil’s bear market rally, oil prices have been driven down as new producers, particularly the U.S., have come back on line.

That’s why I don’t think buying upstream (exploration and production) oil stocks is the way to go here. Cheap oil makes profits challenging for producers, since U.S. producers need to keep oil above the mid-40s to make money.

But the bullish signal is, even when oil production dipped in 2016, exports continued to rise.

That also means the U.S. is importing less and less. Forget 1973… just a decade ago the U.S. was importing 13 million barrels per day. Today, that number stands at 5 million and is falling.

We’re becoming increasingly energy independent. And that could be a very scary thing for Saudi Arabia and the rest of OPEC. Given the region’s constant instability and public animosity to the U.S., it may soon just be easier to supplement oil from other sources and produce more domestically.

Russia is trying to woo China with a pipeline between the two countries, which may afford an advantage to shipping oil to China from the Middle East. Also bear in mind that China was stockpiling reserves at a massive pace when oil was cheap, so it’s not too desperate in the near term. It also has its own oil firms and it’s likely the Chinese have expanded into the South China Sea as much for drilling rights as military purposes.

Bye, bye OPEC

In the big picture view, there’s a very good chance that in the next decade, oil imports and exports will shift from an OPEC driven marketplace to one with diverse centers of gravity and more direct importing country to exporting country deals.

That would be great for the U.S., but not so much Saudi Arabia. But by then we wouldn’t have to worry about an imploding Saudi Arabia since we will be hedged through more stable and friendly countries.

For now, the view from the ground is that midstream producers are the way to go.

The sector of choice now

Midstream producers are essentially the pipeline companies that are the tollbooth operators of the energy markets. They don’t have to worry about whether oil is $24 or $55 a barrel. It’s all the same to them; they work on volume.

And now, U.S. oil companies have a domestic market and a global market that’s creating a lot of demand. These firms will be the initial winners and the most stable ones as this trend matures.

As I mentioned in a column last month, Energy Transfer Partners (NYSE: ETP) is a good choice here. And right now, it’s throwing off a massive 11.6 percent dividend yield.

Other good choices in the group include Enterprise Product Partners (NYSE: EPD), Plains All American Pipeline, LP (NYSE: PAA) and Enbridge Inc (NYSE: ENB).

The next sector to pop will likely be the downstream (refining, distribution, retail), but wait on that until the economy actually hits its stride.  When that happens, the integrated oils will also be worth a look.

— GS Early

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