Energy boom makes oil a surprising safe 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 Fri 4:17 PM
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.



110Comments
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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.
Sat 12:57 AM
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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. 
Sat 12:18 PM
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Simple Math: US produces 9 Million barrels a day? that is 270 million barrels a month.  So far, this year (2014) alone in 7 months we have produced 1890 Million barrels (that is 1.89 Billion barrels)!


1.  WHO in the WORLD is using this oil?

2.  WHY are we still buying oil from other (friendly and unfriendly) countries?

3.  WHY do are gas prices go up 10 cents each time a typhoon hits 10000 miles away?

4.  WHY are we paying double the price (even prior to 9/11 prices) for gas today?

5.  WHY can we not use these revenues/profits to fix our transportation infrastructure ?

6.  WHY don't we care about our own unemployment in the country anymore?

7.  WHY do we BS, that American workers (non whites) need more education, training programs

     when our most talented, best and the brightest of all still unemployed?


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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.

Sat 9:21 AM
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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.  
Sat 3:56 AM
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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."
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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). 

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would you rather have the government get involved an not have any oil?
Fri 9:07 PM
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"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  as a safe haven."

my only comment is to second this idea as a portfolio allocation tool - natural resources will serve as both an asset class with negative correlation to stocks and as a sound inflation hedge.... keep the precious metals component also ...
Sat 3:47 AM
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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.
Fri 8:35 PM
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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.
13 hours ago
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Costs for Producing Crude Oil and Natural Gas, 2007–2009
2009 Dollars per Barrel of Oil Equivalent1
      Lifting Costs     Finding Costs     Total Upstream Costs
United States – Average     $12.18     $21.58     $33.76
    On-shore     $12.73     $18.65     $31.38
    Off-shore     $10.09     $41.51     $51.60
                   
All Other Countries – Average     $9.95     $15.13     $25.08
    Canada     $12.69     $12.07     $24.76
    Africa     $10.31     $35.01     $45.32
    Middle East     $9.89     $6.99     $16.88
    Central & South America     $6.21     $20.43     $26.64

15,618 cubic feet of natural gas equivalent to one barrel.

Source: Tables 10, 11 and 12, Performance Profiles of Major Energy Producers, 2009.

Last reviewed: January 15, 2014
----------------------------------------------------
What do I pay for in a gallon of regular gasoline?

The national average retail price of a gallon of regular gasoline in June 2014 was $3.69. The four main components of the retail price and approximate shares of the total price were

    Crude Oil: 67%.The cost of crude oil as a share of the retail price varies over time and among regions of the country. Refiners paid an average of about $104.00 per barrel of crude oil, or about $2.47 per gallon.
    Refining Costs and Profits: 14%
    Distribution, Marketing, and Retail Costs and Profits: 8%
    Taxes: 12%. Federal excise taxes were 18.4 cents per gallon and state excise taxes averaged 23.52 cents per gallon.

Last updated: July 24, 2014
-------------------------------------------

SOURCE
http://www.eia.gov

17 hours ago
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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.
Sat 10:55 AM
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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. 

Sat 10:58 AM
Sat 3:26 PM
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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.
4 hours ago
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Now that oil can exported, wonder what counties will start buying up the oil companies????

Wonder if there is a big fracking oil boom in Romania and Bulgaria???
Sat 9:20 AM
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Sooner then later, the sustained and manipulated price of Crude will spur innovations that bring Alternative Energy Costs on par or better with Traditional Energy Types. So the Irony shall be that Big Oil and Gas own Greed will also be it's undoing. Too Bad they have gotten away with their Corruption for literally Decades.

Never Forget that Fracking Wells tend to tap out much quicker. Booms can quickly to turn to Burst. That's another reason they keep manipulating the prices Higher. There is a limited amount of Fossil Fuels. There is unlimited amount of Alternative Energies. China is investing heavily in Alternative Energy and we Run a Real Risk of not just having China become the Biggest Economic Power in the World but the Biggest Innovative Power in the World.

Just think of the Innovations that could have been discovered if we used the Trillions wasted on TWO Failed Wars instead towards R&D and rebuilding our failing Infrastructure. Elections do have Consequences.

Sat 8:52 PM
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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
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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....



 

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