Energy boom makes oil a surprising haven

The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.

By MSN Money Partner Jul 25, 2014 4:17PM
An American flag hangs at a BP oil refinery in Wilmington, Calif. (© Jim West/Alamy)By Javier E. David, CNBC

The U.S. -- and the global economy -- may have a new safe haven asset: the growing American oil bounty.

The sociopolitical upheaval in places like IraqLibya and Venezuela has kept oil prices propped up at more than $100 per barrel, underscoring the unstable nature of many oil-producing nations. 

By contrast, U.S. oil supplies -- close to generating 9 million barrels of oil per day ---are expanding, and far more secure than most of those abroad. Simultaneously, the U.S. shale boom has become a draw for international capital. 

To be sure, gold, the dollar and U.S. Treasurys remain the premier safety assets during times of global distress. Meanwhile, oil market dynamics are overwhelmingly driven by supply and demand that place a "fear premium" on internationally priced Brent crude, and which drag on prices when turbulence abates. 

Still, crude is a long-term asset that attracts both investors and speculators. Meanwhile, America's shale production has put the country on the same terrain as Saudi Arabia and Russia as an energy power. In the process, it's turned a number of assumptions about oil and gas supply on their ear. Many economists have pointed out that fossil fuels are not as pricey as they could be in the face of a world in turmoil.

In recent research, Barclays noted that the "advent of U.S. (shale) oil has made the oil market much less vulnerable to supply shocks than in the past." With OPEC production constrained and non-OPEC supply on the rise, "the market is not as reliant on OPEC to fill supply gaps," the bank said, helping to contain oil's upside. All of that could eventually give U.S. oil a stability premium, some say.

So does that make U.S. crude a safe haven in all but name? That effect may already be underway, and may be at least one reason behind why prices are so stable.

"In the case of U.S. crude there are a variety of things ... that mark up crude prices, and that includes a hypothetical risk premium to hedge against global disasters," said Richard Hastings, macro strategist at Global Hunter Securities. He argued that the narrowing premium between U.S. light sweet crude and Brent -- less than $6 as of Friday -- is a manifestation of how the market may be repricing crude to reflect more stable domestic supplies. Last year, the two contracts briefly converged.

"Not only is [U.S.] oil safe, secure and reliable, but it can be an esoteric hedging mechanism, and that's one of the reasons it's pricey," he said. With so much supply in the marketplace, "crude should not be so expensive, but that's not the case at all," the analyst added.

European refining capacity is diminishing at the same time that U.S. fuel exports are on the rise. Those factors "wind up creating value for our inventory," Hastings said.

Elevated Brent crude prices, the primary mechanism by which gasoline is priced, have consumers still paying more than $3 per gallon at the pump. However, oil has yet to match the highs seen in 2011, when a wave of uprisings toppled Middle East governments and drove West Texas Intermediate above $114 per barrel and Brent to near $125.

All of which suggests the idea of U.S. crude being a shelter from turmoil abroad may not be as far fetched as it seems. Last year, Goldman Sachs raised eyebrows when it suggested commodities were slowly becoming a stand-in for gold as a safe haven. At the time, the investment bank recommended shorting bullion while going long natural gas, largely in response to the shale revolution.

Sheryl King, senior director of research at Roubini Global Economics, said the lack of volatility in markets reflects a growing belief that the U.S. recovery has legs.

"In general, people are becoming more confident in the economic cycle, impacting all markets including commodities," she said.

However, King acknowledged that the stability of U.S. crude oil supply was a containment mechanism for oil prices. "The U.S. is a more secure source of energy, and it is largely driven by the private sector," unlike the state-owned entities that dominate OPEC. "In the U.S., those mechanisms don't exist," King added.

Jul 25, 2014 4:32PM
9 million barrels per day... PER DAY!!!!!!!!
Yet we still pay nearly $4.00/gal at the pump, because oil companies would rather export and make more money than to refine/process for this country and keep fuel prices low in this country. It's all about greed.
Jul 26, 2014 12:57AM
I'm amazed at all the negativity to oil companies. The profits seem high, but the margins per gallon/barrel are very small. Refining capacity is decreasing, while its is more economical to sell distilled product abroad for additional profit. Money can be made by looking at some smaller shale companies in the Bakkan regions. What is and has been needed since the initial 1973 oil embargo is a national energy policy. A secure, reliable, and predicable national energy policy. That would change the entire geo political game. Once secured domestically, the country could THEN aid Europe to become less depend on Russian oil/gas. This is the one thing that needs to be done ASAP. 
Jul 26, 2014 12:11AM

There's no stopping big oil. A lot of people don't remember the early 90's when the EPA ( bought politicians ) ran all of the independents out of business. We used to have price wars.

If we start using half as much, they'll just jack the prices up twice as much.

Yeah oils a good investment.... if you like dealing with the devil.

Jul 26, 2014 3:56AM
Exclusive: Exxon eyes expanding Texas refinery into biggest in U.S.  sources
July 25, 2014 3:36 PM ET
By Erwin Seba

"HOUSTON (Reuters)Exxon Mobil Corp is considering a multibillion-dollar plan to expand its Beaumont, Texas, refinery into the country's largest, the first major refining investment of the U.S. shale oil boom, people with knowledge of the deliberations said.

The expansion of the 344,600 barrel-per-day (bpd) Beaumont refinery, if carried out, would be completed by 2020 and potentially double its size with the addition of a third crude distillation unit (CDU), the sources said"

"Marathon invested $3.9 billion to boost its Garyville, Louisiana, refinery from 256,000 bpd to 436,000 bpd in 2009. The refinery has optimized performance of its units to increase production to 522,000 bpd."
Jul 26, 2014 6:27AM
would you rather have the government get involved an not have any oil?
Jul 26, 2014 9:21AM
I always like oil as a hedge against trouble. I also like cigarettes , liquor and entertainment like Disney, Cinemark , Comcast NBC Universal as hedges as well. When things get very bad people smoke more , drink more and tend to entertain themselves to forget their troubles. Also, you can't go wrong with toilet paper.  
Jul 28, 2014 10:18AM

james1954....When you come on here with OUTRIGHT LIES; YOU really look kind of STUPID...

On top of being a GD Liar...

Possibly the charts that Dave provided WTI (west texas intermediate crude) and Brent (European) comparisons may give you some insight...

Providing you can READ or COMPREHEND....Which I really doubt, you are capable of doing..?

Jul 25, 2014 11:52PM

All investments tied to the "oil patch", have been pretty damn good growth vehicles and produced excellent revenue streams and dividends, the last several years..

That would include....Oil/Ngas majors E&P...Pipelines...Refiners...Retailers.

And has added business to transportation, Rail and Trucking...along with Coal (some companies). 

Jul 26, 2014 10:58AM
Jul 26, 2014 8:52PM
oil has become a safe heaven as investment.Since Obama came to power oil price went from $36 to $102 outperforming gold tthat was $900 oz and the dow.All because of Obama money printing and reluctance to let oil companies to explore in the atlantic ocean.also opec doesn't want to be paid with papers so they reduce production to correct up oil price
Jul 28, 2014 3:55AM
Cushing, OK WTI Spot Price FOB (Dollars per Barrel)
       Year-0     Year-1     Year-2     Year-3     Year-4     Year-5     Year-6     Year-7     Year-8     Year-9
  1980's                                                                                                 15.05     19.20     15.97     19.64
  1990's     24.53     21.54     20.58     18.43     17.20     18.43     22.12     20.61     14.42     19.34
  2000's     30.38     25.98     26.18     31.08     41.51     56.64     66.05     72.34     99.67     61.95
  2010's     79.48     94.88     94.05     97.98                        

- = No Data Reported;  -- = Not Applicable;  NA = Not Available;  W = Withheld to avoid disclosure of individual company data.
Release Date: 7/23/2014
Next Release Date: 7/30/2014
Europe Brent Spot Price FOB (Dollars per Barrel)
      Year-0     Year-1     Year-2     Year-3     Year-4     Year-5     Year-6     Year-7     Year-8     Year-9
  1980's                                                                                                                18.53     14.91     18.23
  1990's     23.76     20.04     19.32     17.01     15.86     17.02     20.64     19.11     12.76     17.90
  2000's     28.66     24.46     24.99     28.85     38.26     54.57     65.16     72.44     96.94     61.74
  2010's     79.61     111.26     111.63     108.56                        

- = No Data Reported;  -- = Not Applicable;  NA = Not Available;  W = Withheld to avoid disclosure of individual company data.
Release Date: 7/23/2014
Next Release Date: 7/30/2014

Jul 26, 2014 10:55AM

Is there a General in the house? The War College needs to change the flight path of the B-29's. The ocean is only 150 Mi. south of us and let them fly there. They scare the Moose Herd and they can't breed. The herd is dwindling and with a big down turn. They bother us too and we can't concentrate on our stocks. 

Jul 26, 2014 4:22PM

Yeah I hate to think where the price of OPEC oil would be if we hadn't, lit the fuse for the constant disruption in the Middle East and Northern Africa...

But the Saudis said they can't make any money @ $50-60 a barrel and we knew who their friends were...

Plus there are a few well known families that still have plenty of ties to the "oil patch".

And old scores to settle up, for some debts..

Don't look for oil to go below $75-85 per bbl. for a long, long time...

Even if we do become energy independent...IMO.

At least not until "alternate energy" puts the squeeze on it....


Jul 26, 2014 3:47AM
Poster states, "I'm amazed at all the negativity to oil companies. The profits seem high, but the margins per gallon/barrel are very small. Refining capacity is decreasing, while its is more economical to sell distilled product abroad for additional profit. Money can be made by looking at some smaller shale companies in the Bakkan regions"

Well I am amazed there still so many sheep  out there still Naive to the Corruption and Manipulations of Big Energy Companies here and abroad. In 2013, 7 out of the Top 10 Companies by Revenue were in Big Energy. 12 out of the Top 20. Margins are more Dependent on Source as profit margin per barrel can vary Wildly. Refining Capacity decreased because Big Oil closed Down a significant portion of Refining Capacity here and abroad. They know all too well that by limited Gasoline supplies, they can better manipulate price.

Then there's the case of efficiently running a Business, those that don't, they have lower profit margins. So some Fools think it's fine and Dandy for Americans to use LESS, but Pay far more in spite of Soaring Domestic Production. It's not our job to secure better prices for Europe but to secure better prices for America.

The myths and LIES Big Oil and Energy have been spreading for Decades are finally being Exposed. It's about Darn time. Be careful about just investing/speculating in any sector of Big Energy, it's not as Sure Fire as some might suggest. It never is.

Fracking Wells tend to tap out far quicker then others while Refiners can get squeezed almost literally overnight. We are also likely to far closer to another Deep Recession then many might realize. That can really destroy Global Demand. I highly doubt the that the Sectors as a Group that perform so well the last several Years will do the same moving forward. We have never seen this high of an Manipulated Price for Crude for such a Long Stretch of time, EVER. I suspect eventually enough folks will get a clue and do something about it.
Jul 27, 2014 8:06AM
This article doesn't mentioned that oil use in the US has peaked and vehicles are more efficient than ever. The trend will continue with demand going down, down, down.
Jul 25, 2014 8:35PM
Not to worry, the enviro freaks who own the Obama administration will shut down all energy production in the US.
They lack the mental capacity to understand how their homes are heated, cooled and where the fuel comes from that powers their automobiles.
Jul 28, 2014 4:13AM
20 March 2003 - MSN India News
Mar 19, 2013 - The Iraq war began on 20 March 2003 (19 March in America). A US-led coalition of forces, comprising the United States, the United Kingdom, ...

Jul 31, 2014 2:55PM

Build the Keystone Pipeline , sell only what America don't need overseas ,cut the Federal , State and local taxes on oil and gas will still be $2.50 a gal.

Go to Europe and pay 6-7 bucks a gallon.

The Liberals would love it ,if you gave up your car and got on the bus.

Then they could control where you went , the route , and the time .

Remember a barrel of crude oil yields only gallons of gasoline.

Jul 29, 2014 2:54PM
All I heard for years from certain political party members is "Drill Baby Drill". Their logic was that if we rape our land and drill for oil we will become energy independent and gas prices would go down.

This was never true and they knew it. It was not long ago that many were criticizing President Obama for not allowing more drilling. Claiming that he was stopping us from becoming independent.

Now they want to allow a foreign owned company to create another pipeline (Keystone) out of Canada down to the gulf. The result will be the same. They will use our resources and continue to rape the public at the pump.

Jul 26, 2014 3:26PM
Thank God "W" invaded the middle east and drove oil from stagnant $18 a barrel to $125 where it will always stay as a new standard. Yes, Wall St has made trillions with Obama but remember it was Bush that set the motion.Think of where we'd be without those two? Not making record profits that's for sure.
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