How Will Surging U.S. Oil Production Impact Investors?

The U.S. is now the world’s largest oil producer. What does this mean for the oil patch, and for your portfolio?

The Motley Fool

In the first six months of 2014, the U.S. became the world’s largest oil producer, overtaking both Saudi Arabia and Russia to secure the top spot. This is well before 2020, which was when most analysts had speculated this would occur. This, along with the U.S. becoming the largest producer of natural gas globally in 2010, has seen it become an energy-producing powerhouse, creating lower energy prices and giving its economy a distinct edge.

It is these low energy prices that are, in part, responsible for the better-than-expected economic data coming from the U.S. for the first half of this year, along with its economic recovery gaining further traction. According to a range of analysts, the explosive growth in U.S. shale oil production will continue for the foreseeable future, with improving technology boosting production and making previously non-commercial reserves commercially recoverable.

How does this impact the oil patch?

Significant growth in U.S. oil production and restrictions on exporting oil produced in the U.S. continue to depress the price of West Texas Intermediate, with the country already awash in light sweet crude. This is despite the crisis in Iraq and other tensions in the Middle East, which initially caused crude prices to surge.

While this is certainly good news for the U.S. economy, it is a dark moment for Canada’s oil patch. Over a third of the country’s oil imports are obtained from Canada, and it accepts over 90% of Canada’s total oil exports. This amounts to a considerable portion of Canada’s domestic production and makes it a key market for the patch.

This development couldn’t come at a worse time for the patch. The current pipeline crunch is limiting how much crude Canadian oil producers are able to cost-effectively transport to key Gulf Coast refining markets. It is also limiting the ability of operators in the patch to access other key refining markets in Asia, the Pacific Rim, and Europe.

Furthermore, with U.S. oil production growing so rapidly and the restrictions on exporting U.S.-produced oil set to continue, softer demand and WTI prices will continue for the foreseeable future.

These developments will create lower realized prices for Canadian oil producers and cause the price differentials between Canadian light and heavy crude blends to WTI to widen. This will impact the bottom line of many operators in the patch, especially those solely reliant on access to the U.S. for the sale of their crude.

Which operators in the patch are best positioned to overcome this latest development?

It is those companies operating in the patch that have geographically diversified offshore operations and the ability to access refining markets other than the U.S. that are best positioned to minimize the impact of this development.

Among them are the integrated energy majors, such as Suncor Energy (TSX: SU)(NYSE: SU), Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ), and Husky Energy (TSX: HSE). Of these, Husky is the best positioned. The company already has lucrative contracts with China for the sale of natural gas from its Liwan gas project, and was the first operator in the patch to export crude to India.

A range of smaller operators domiciled in Canada but operating offshore in Latin America, Africa, and Europe are also accessing refining markets other than the U.S. This, in many cases, is also allowing them access to higher Brent prices, which are at a premium of 7% to WTI.

These smaller operators include Canadian companies operating in Latin America such as Pacific Rubiales (TSX: PRE), Parex Resources (TSX: PXT), Gran Tierra Energy (TSX: GTE)(NYSE: GTE), and Canacol Energy (TSX: CNE). Even troubled energy major Talisman Energy (TSX: TLM)(NYSE: TLM) is well positioned to manage this development, with operations spanning Colombia, the North Atlantic, and the Middle East.

Other operators moving fast to minimize the impact of this problem are Enbridge (TSX: ENB)(NYSE: ENB) and Crescent Point Energy (TSX: CPG)(NYSE: CPG). The first has already obtained a license to re-export Canadian crude from the U.S. and the second is considering that option, allowing them to access important European and Asian markets.

This development emphasizes that the ability of operators in the patch to grow oil production and reserves is only half the game, with the other half being their ability to access key export markets that are willing to pay a premium for their crude. Clearly, with U.S. crude production set to continue growing, investors should be looking for those operators that are able to access alternative export markets and are minimally impacted by the pipeline crunch.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith does not own shares of any companies mentioned.

More on Investing

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Diggers and trucks in a coal mine
Metals and Mining Stocks

1 Canadian Mining Stock Worth a Long-Term Investment

Cameco (TSX:CCO) stock could be a great long-term investment for Canadian growth seekers.

Read more »

Pot stocks are a riskier investment

Could Investing $10,000 in Aurora Cannabis Stock Make You a Millionaire?

Let's dive into whether Aurora Cannabis (TSX:ACB) could be a potential millionaire-maker stock, or a dud, over the long term.

Read more »

stock analysis
Energy Stocks

Is Enbridge Stock a Good Buy in May 2024?

Boasting high-yielding dividends and a stable underlying business, Enbridge (TSX:ENB) might be a great buy for your self-directed investment portfolio…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

1 Growth Stock With Legit Potential to Outperform the Market

Identifying the stocks that have outperformed the market (in the past) is relatively easy, but selecting the ones that will…

Read more »

healthcare pharma
Tech Stocks

Well Health Stock Is Up 7% After Earnings: What Investors Need to Know

Well Health is benefiting from strong demand as it digitizes healthcare and strives to improve patient outcomes.

Read more »

money cash dividends
Dividend Stocks

Passive Income: The Investment Needed to Yield $1,000 Per Annum

Do you want to generate a juicy passive-income stream? Here's a trio of stocks that can generate a yield of…

Read more »

Dividend Stocks

Here’s the Average TFSA Balance in 2024

The average TFSA balance has steadily risen over the last six years and surpassed $41,510 in 2023. Will the TFSA…

Read more »