Upside for Oil Appears Limited, but Investments in Oil Markets Aren’t
Oil prices have rallied back to the $100.00-per-barrel level on some near-term supply and inventory concerns.
While the upside move is rewarding the buyers of oil stocks, I don’t think oil prices are set for an extended rally.
The chart of the West Texas Intermediate (WTI) crude oil shows oil prices bouncing higher after the formation of a bullish double bottom, based on my technical analysis. And while oil prices can head higher on the chart, I just don’t see any moves being sustainable.
Chart courtesy of www.StockCharts.com
The catalyst for higher oil prices has more to do with tight inventories driven by a rise in demand. The inventory of oil contracted by 1.5 million barrels per day in October to December 2013, according to the International Energy Agency (IEA). The IEA suggests the demand for oil will rise by 50,000 barrels per day to 1.3 million barrels in 2014. (Source: Johnson, C. and Sheppard, D., “Robust demand tightening oil market, IEA says,” Reuters, February 13, 2014.) If this estimate pans out, oil prices could edge higher and hold above $100.00, but I doubt the move will last that long.
Now, if China jumps out of its sluggish growth (read “Investment Opportunities in Depressed Chinese Stocks”) and Europe can drive its economic renewal, then we could see brighter prospects for oil prices.
On the supply side, America is relying less on the Organization of the Petroleum Exporting Countries (OPEC) and foreign oil as American oil companies continue to squeeze more oil out of the ground, specifically shale oil.
There may even be a time down the road when the country will not have to buy any OPEC oil, especially if the U.S. can increase its shale oil, grow its wind and solar energies, and increase the flow of friendly oil from the Tar Sands in Canada. The major Keystone pipeline project has passed environmental assessments, but it will need the approval of the government. I expect this to happen, and it will result in a significant flow of oil from up north.
A look at the futures oil market indicates oil prices are likely to stay in the $100.00 range and lower over the next few years unless we see a geopolitical upheaval in the Middle East; I’m talking about the likes of Iran and Syria.
A look at the oil futures indicates that oil prices will eventually move back down towards $94.00 by the end of 2014, followed by a move to below $90.00 in 2015 and less than $80.00 by 2018.
What I would suggest investors do is focus on the oil services and oil companies that are involved in the fracking market, such as Continental Resources, Inc. (NYSE/CLR) and Whiting Petroleum Corporation (NYSE/WLL).
A smaller oil play on the Bakken oil fields is Kodiak Oil & Gas Corp. (NYSE/KOG), which has been making some moves on the chart. The mid-cap owns and controls about 154,000 net acres of land at the company’s operation in the Williston Basin in North Dakota. The revenue growth has been stellar, with revenues increasing from $11.3 million in 2009 to $409 million in 2012. The future looks bright for Kodak Oil & Gas.
So while I think oil will find it difficult to move much higher, there are still some good buying opportunities for oil stocks.