High oil prices are here to stay

Sure, US production is high now. But there are only 2 major drivers for that growth, and both are slowing.

By StreetAuthority Jun 10, 2014 1:20PM

Image: Oil drums © Kevin Phillips, Digital Vision, age fotostockBy Jody Chudley, StreetAuthority


American oil production is surging. Yet oil prices remain near $100 a barrel.


You may be wondering: When will all of this additional production finally overtake demand and push the price of oil down?


You can find one answer in the price of oil futures -- which say we can expect oil to fall to closer to $80 in the coming few years and stay there.


Is the market correct? Are oil prices heading south?


I think that the answer is no, for several reasons -- especially after I listened to a recent presentation by Bill Thomas, the CEO and chairman of EOG Resources (EOG).


EOG is, by a considerable margin, the largest horizontal oil producer in the world. That means the company has access to the best data available on horizontal oil production and resources.


Put simply, EOG and Thomas believe that the futures market is all wrong about oil prices. The company is bullish on oil and focused on producing more of it.


What EOG sees -- and the market doesn't seem to grasp -- is that for all intents and purposes, the horizontal oil boom is coming from only two plays: the Bakken Formation in the upper Midwest and the Eagle Ford Shale in South Texas. A slide from EOG's most recent investor presentation illustrates this clearly:

Fully three-quarters of the horizontal oil being produced in the United States comes from the Bakken and Eagle Ford. Without these plays, the horizontal boom would be barely noticeable.

Equally important to note is that production growth in both the Bakken and the Eagle Ford is slowing significantly. The growth of production both by rate and absolute amount in both of these plays appears to have peaked.


During his recent presentation, EOG's Thomas was asked what the next big horizontal oil play in the United States would be. His answer? There isn't going to be one.


EOG has scoured the United States and hasn't found a new play with anything close to the productive capability of the Bakken and Eagle Ford.


What makes the Bakken and Eagle Ford unique is that they are crude oil plays. Most of the other large horizontal plays are "combo" plays that have large hydrocarbon accumulations, but much of those hydrocarbons are in the form of natural gas and natural gas liquids.


For example, in his presentation, Thomas referred to the Permian Basin in West Texas as having lots of barrels of oil equivalent (BOEs) -- but heavy on the "equivalent" and light on the oil. There is going to be a lot of production from the Permian in the coming years, but a great deal of it won't be oil.


Large, profitable oil plays are few and far between, and they are getting harder and harder to find. The Bakken and the Eagle Ford are No. 1 and No. 1a, and there is no No. 2.


So what does this mean for investors? In my view, it means that while oil production in the United States will keep growing for the next several years, the pace of that growth is going to be greatly reduced. With annual global oil demand growing at roughly 1 million barrels a day and oil production outside of North America not growing at all, oil prices are going to remain high and perhaps even go higher.


The companies in the sweet spot are the ones that have locked up large land positions in the top horizontal oil plays. EOG is one of those; Continental Resources (CLR) is another.


EOG's Eagle Ford stake contains an astounding amount of oil. EOG has 564,000 acres in the Eagle Ford oil window, the largest position in the industry. EOG estimates it will eventually recover 3.2 billion barrels of oil from that land -- and over time, with improving techniques and technology, the company may well do better than that.


Continental Resources is primarily focused on the Bakken, where it produces nearly 100,000 barrels a day. Like EOG in the Eagle Ford, Continental is the largest leaseholder in the Bakken, with 1.2 million acres. (EOG also has a sizable position.)


Since 2008, Continental has increased its proved and probable oil reserves from 159 million barrels to over 1 billion barrels. That is a compound annual growth rate of 47% -- and there is likely more still to come.


These land positions should allow EOG and Continental to continue to increase reserves and production as oil prices rise in the coming decades. As an investor, I'm most excited by what the future might hold in these premier oil plays. Secondary recovery methods such as water flooding (which I discussed last week) or natural gas injection could significantly increase the amount of oil that these plays can produce.


The key is owning the land.


Risks to consider: The greatest risk is a potential "cure" for oil as our primary transportation fuel. For example, the advent of affordable and high-performance electric cars could put a significant dent in global oil demand.


Action to take: It's looking like we're in for a future of high oil prices -- and the companies best positioned to thrive are oil producers like EOG and Continental that control the largest and best land positions in the Bakken and Eagle Ford.

Tags: CLREOG
368Comments
Jun 10, 2014 2:24PM
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There is no free market model that can be applied here.  They control production and thus control price.  The laws of supply and demand do not apply.  The thing that really angers me is this, how can we EVER be energy independent of Mideastern oil when we are exporting our domestic oil.  There shouldn't be one single barrel that leaves this country until the price of oil declines for every US citizen.  They are OUR natural resources and we are paying for them in the form of higher gasoline prices every day.  I just can't understand why the leaders of this country can not see the impact of high fuel prices dragging us all down and they do NOTHING! 
Jun 10, 2014 2:45PM
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They forgot the MOST important reason ........... GREED !!!!!! More is NEVER enough.
Jun 10, 2014 2:33PM
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"When will all of this additional production finally overtake demand and push the price of oil down?"


NEVER. OPEC and the industry are corrupt! They know that they can get this price, so basic supply and demand doesn't have to enter into the equation. They'll continue to keep it high, and screw the public.

Jun 10, 2014 2:48PM
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Nobody mentions the big G word:   GREED.  Nobody gives a daman about anybody but themselves and the price is never going down if it means the person making that decision is going to make a little less.  How about billions less?  There is no law that stops energy speculation or makes day traders and buyers hold energy stocks for more than five seconds.  How is that going to stabilize oil stocks.  even if the price drops, the speculators drive it back up.  GREED, GREED, GREED.  The consumers are at the bottom of the food chain.  Congress doesn't even pay for their own gas, why should they care?
Jun 10, 2014 2:57PM
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I don't care what it means for investors - investors be damned, I only care about what it means for the consumer at the pump. There is NO reason anyone can give me that will make it "ok" for oil companies to charge what they do a gallon. We should be outraged to pay what we pay and our National leaders should be dragged out of their beds and forced to address this symptom of our greater economic failing. The longer things just like this are allowed to continue the further we get from any semblance of an acceptable economy.
Jun 10, 2014 3:08PM
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Well i remember when all the libtards were blaming Bush & Cheney for high gas prices.....Looks like its really Obama & Biden who are in bed with big oil...
Jun 10, 2014 2:51PM
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oil prices never head "south"!

 

DUH!

Jun 10, 2014 2:41PM
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Its simple we need it, they have it, we get bent over and they fucck us. There is no free market on oil anymore since they got it into there heads that no matter what you or someone else will pay for it. So spread your cheeks and smile cause prices are not going down for a while.
Jun 10, 2014 3:18PM
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Greed? Who makes the most money off of oil? The Government with it's endless taxes. Just like electricity and water, the less of it you use the more it costs. Ask anyone conserving in California.
Jun 10, 2014 1:41PM
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Surprise! CARTEL what do you expect? supply and demand has nothing to do with it. Drill baby drill. LOL
Jun 10, 2014 3:12PM
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The so called "oil" is harvested by private oil companies. Unlike many other countries that have nationalized the exploration, harvesting, and production of crude and their distilled byproducts (gasoline) (see Mexico, Venezuela), most of the companies here in the good ol' USA are private companies who do in fact look to make a profit. The real issue is not the price per barrel, but the refining capacity (kept low) to lower the supply and increase demand. If refinery capacity increases, the amount of actual gasoline would be increase. The U.S. oil companies are also large gasoline exporters. In the end, its a global commodity, not simply a domestic commodity. The shame of it all is that realistically, from an economic strategic position, keeping domestic supplies and refining capacity at home would create a much better situation for the country as a whole.
Jun 10, 2014 3:04PM
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All oil transactions are handled in the commodities markets, where banks, and airlines, and foreign countries can all compete to buy the oil. Sadly, most of them speculate and create a false ceiling on the cost of oil versus what it really costs to get out of the ground. It doesn't cost much more today to get out of the ground as it did forty years ago, but we can see what speculation does to the prices at the pump! What we need to do is nationalize our natural resources (oil) and stop the bidding process and establish a real market price, not one that requires us to pay $75.00 for a small tank of gas, while the Koch Brothers sit on their veranda laughing their asses off!
Jun 10, 2014 2:28PM
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Until we have reliable and relatively inexpensive electric vehicles we will pay whatever premium producers charge. When that happens, watch and see how quickly those prices will drop.
Jun 10, 2014 2:11PM
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If I do remember correctly, the pricing of oil futures is directly related to the oil supply and demand of the OPEC countries which the US in not a part of.   

OPEC nations are the largest supplier of the world's oil.  This article is very misleading as it insinuates that the US companies can control oil prices which is absolutely not correct.  

Just because oil is traded in US Dollars does not mean that the US Companies can control the price,only OPEC can do that as they are MUCH MORE larger than anything the US can produce.
Jun 10, 2014 1:47PM
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This is hardly a revelation as various articles have already pointed most of this out. However, the Biggest Talking Heads in the Mainstream Media barely mentions things like this. Also, this just means the push for Alternative Energy will only GROW. Warren Buffett, just this week says he ready to double Down on his current investment in Solar and Wind. From $15Billion to over $30Billion.

The Writing is already on the Wall for Fossil Fuels and the Revolution which is alternative Energy is knocking on the Doorsteps.

Jun 10, 2014 3:15PM
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just remember when voting who wanted more production and drilling and pipelines and who was against the epa rulings that will only make everything energy related cost more.. thats right vot against anything associated with captain crazy obama and those who vote with him.. 
Jun 10, 2014 3:37PM
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if a republican were president, the media would say the GOP is in bed with big freakin' oil.  but since barry is president..................................................................not a word of political blame.  we have grown to accept the unacceptable. 


Jun 10, 2014 3:01PM
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What can't the connection between oil and gas prices be broken? It would force speculators to actually SPECULATE.

As it is now - the second oil prices go up gas prices go up. The industry sees an immediate return every time they jack up the cost of a barrel of oil. Perhaps severing this magical connection would discourage some of the speculation that drives the oil market higher on pure-profit motivations.

Jun 10, 2014 1:48PM
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tesla ... or one of the slew of cool new scooters ...
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You American's keep complaining forgetting that your government is no longer in the business of looking out for YOU the PEOPLE.  Your politicians are too busy making deals and money for themselves to be concerned about your needs.  Oh, they care for you, only when its time for you to vote.  The day they realize they don't need your vote you're 100% on your own.  Good luck!
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