The Organization of Petroleum Exporting Countries (OPEC) is witnessing its final hurrah on the world energy stage.
In late 2014, OPEC made a bold move that in retrospect will be the historic turning point in the oil cartel’s command of the global oil markets. This will also hold significant implications for U.S. dollar, but for now, let’s look at where we stand in the energy patch.
OPEC basically brought together all the Middle East oil producers, along with a few countries from South America and Africa. Three decades ago the cartel made a lot of sense since it was the main commodity that these countries could sell to the developed world.
And because few first world nations had much interest in developing their own reserves, it was good relationship for both sides. The oil embargo in the 1970s started to change that view, especially for the U.S.
The kingdom overplays its hand
Since then, it has been a tenuous relationship with Saudi Arabia in particular. On one hand we will support and protect their shipping lanes and borders, and on the other we have to deal with their support of terrorists whose main goal is to destroy everything the U.S. stands for.
9/11 once again brought this uneasy relationship to the forefront. But today, technology is on the U.S. side and unconventional drilling technologies mean that previously hard-to-reach reserves are within striking distance on the U.S. mainland.
And offshore, these new technologies mean exploration and production in parts of the ocean where it was impossible to drill years ago.
With all that new oil online, these new opportunities have shifted the paradigm, and the U.S. is no longer tied to the fate of Middle East oil.
But this growing independence made Saudi Arabia anxious, so it wanted to teach the U.S. producers a lesson by dropping production limits, flooding the world with oil — and the price of oil plummeted.
That hammered the domestic shale energy boom which needs around $50 a barrel to stay in business… except that some of the Kingdom’s partners weren’t happy with ultra-cheap oil, since they couldn’t produce as cheaply as Saudi Arabia could either, just like the U.S.
Internal cartel strife began.
The war the Saudis were waging in Yemen was draining its coffers and domestic unrest was becoming a real problem.
That’s ultimately why they put production limits back in place — they were losing the cartel and they were hemorrhaging money.
Where from here?
Once production limits were back in place, it set a floor where U.S. exploration and production (E&P) companies could get back to work profitably.
And while President Trump has had his share of problems navigating healthcare, he has made some big steps as far as the domestic energy patch goes. Having a former CEO of the largest publicly traded oil company in the world also helps when building out a national industry in energy.
The point is, the U.S. is back, and with oil prices moderating around the 40s and 50s, it’s been a boon for all those E&P firms. U.S. production is back in action and Saudi Arabia and its OPEC partners will need figure out what the value of the cartel is now that its biggest client is weaning itself off Middle East crude.
Made in the USA
There are still some challenges ahead for U.S. energy production, but at this point it safe to assume the domestic energy patch is going to get all the support it needs.
And while I’m bullish on shales oil and natural gas production, this is no time to buy coal. Regardless of the slashing of regulations, coal is not going to get back to where it once was.
In the U.S., natural gas is cheaper and more efficient and most generation plants have already converted. Coal exports may help get some coal companies out of bankruptcy but there are plenty of coal producers outside the U.S. that can supply developing markets.
At this point in the cycle, your safest bet is to stick with midstream energy companies that distribute and store the oil and gas out of the big U.S. shales, as well as Canada.
President Trump was already green lighted the Dakota Access Pipeline as well as the Keystone XL pipeline. These aren’t game changers but they are a commitment to U.S. production and distribution.
Keystone XL will get Canadian oil to U.S. ports and distribution points more directly, which means U.S. E&Ps won’t see much benefit but pipeline companies will.
Enterprise Product Partners, Plains All American, Enbridge and Williams Companies are all good choices. Enterprise is throwing off a nearly 6 percent dividend; Plains is 7 percent; Enbridge is 4 percent; and Williams is 4 percent.
The worst is over and the best is yet to come for these companies.
— GS Early