In January 2018, crude oil prices slipped from a high of $66 to $58 as fears of repeat “drill baby, drill” mentality from U.S. shale producers, which once flooded the market and brought prices down, were again becoming palpable.
However, this month oil prices have recovered somewhat to $63.
Part of the reason for that was news that crude inventories unexpectedly fell by 1.6 million barrels, as net imports dropped to record lows and exports surged. (Analysts had projected a build of 1.8 million barrels.) Inventory even declined by 2.7 million barrels at the key storage facility in Cushing, Oklahoma – its ninth straight week of drawdowns.
In short, crude inventory numbers were better than expected. And as long as we have healthy numbers, it helps to ease fears of oversupply.
In addition, OPEC output cuts apparently are draining excess supply.
Shipments from the oil group are expected to fall by 300,000 barrels a day. Plus, Bloomberg noted that United Emirates’ Energy Minister Suhail Al Mazrouei said, “the world is in oil undersupply, not oversupply.”
So, we can still make a powerful argument to buy U.S. oil producer stocks -- especially those with a foothold in the Permian Basin, which is setting historical records and has created a substantial land rush that’s not likely to die off any time soon.
According to research firm, IHS Markit, the Permian Basin has between 60 billion and 70 billion barrels of recoverable oil, worth $3.3 trillion at current prices. Since 1923, notes Bloomberg, more than 30 billion barrels of oil have been extracted. That means, according to IHS Markit, the region still holds more than twice as much recoverable oil as has been drilled over the last 94 years.
Even oil veterans were a bit shocked.
“How can we have been drilling in the Permian Basin for 100 years and then find out it has twice as much as we thought?” T. Boone Pickens asked.
But what’s most exciting is that some companies are completely shifting their focus to this red-hot, oil-rich region – also known as the Super Basin or, as others prefer to call it, Saudi Texas.
For example, Pioneer Natural Resources just announced it would sell its non-Permian Basin acreage and infrastructure to solely focus on the Permian Basin. That news came the same day that Halcon Resources (HK) announced a $381 million acquisition of 22,000+ acres in the Basin.
A few weeks earlier, Oasis Petroleum announced it was jumping in with 20,000+ acres, and Exxon Mobil announced it would triple its production over the next five years, as well.
Canadian firms are moving to the region, too. In fact, AKITA Drilling and Trinidad Drilling are moving to the Basin. “From our point of view, it makes sense to place rigs where the demand is strongest, and demand is strongest in the U.S., and particularly the Permian Basin,” commented Lisa Ottmann, Trinidad’s vice president, investor relations, as quoted by Midland Reporter Telegram.
As oil prices begin to recover from recent lows, we’re finding some opportunities for future issues of The Cheap Investor.