Our outlook for energy stocks

U.S. oil production shows strength, while political turmoil threatens the global oil supply outlook.

Stephen Ellis 2 October, 2013 | 6:00PM
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U.S. oil production still looks strong. Recent data points suggest that Texas is becoming an increasingly important contributor to U.S. supply growth while North Dakota--while still on the upswing--appears to be slowing down.
Syria and Africa make for an eventful near-term global oil supply outlook. If we include Iran, recent events in these countries have removed almost 3 million barrels per day (bpd) from the global oil supply picture. We consider the risk of a broader war between the various Middle Eastern oil producers rather low, but any negative developments could have an outsized impact on oil prices.
The outlook for U.S. natural gas prices still looks decent, but recent data points are mixed. Natural gas storage levels have increased since our last review (a negative), but overall U.S. dry gas production growth is slowing and the natural gas rig count is picking up, which we consider positive developments. An uptick in rigs in the absence of any meaningful movement in the future curve signals producers' need to offset declining production volumes to generate cash flow. On the demand side, we think there is substantial room for U.S. natural gas demand to exceed expectations by 2020, led by higher LNG, pipeline exports and industrial demand.

We continue to be impressed by U.S. crude oil production growth. According to the U.S. Energy Information Administration, in June 2013 U.S crude oil production, at 7.2 million bpd, was up 1 million bpd over 2012 levels. As we mentioned last quarter, North Dakota oil production remains strong, and it now stands at 821,000 bpd versus 665,000 bpd in 2012, a 23% improvement. Texas's performance is even better, as the state's production is almost 2.6 million bpd, up more than 600,000 bpd from 2012 levels, which is a 30%-plus improvement. The difference in year-to-date growth numbers is starker, with North Dakota's production increasing just 83,000 bpd since the start of the year, while Texas' production has increased 280,000 bpd over the same time frame. The difference in production growth suggests that the productivity at the once-prolific Bakken field has perhaps peaked. That said, the overall healthy growth picture supports our contention that the United States' reliance on imports is declining, and by the end of 2013, China should become the world's largest importer of crude oil.

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Stephen Ellis

Stephen Ellis  Stephen Ellis is an energy and utilities strategist for Morningstar.

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