How to invest in the U.S. oil ‘supply shock’ Oil drillers and

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SAN FRANCISCO (MarketWatch) —The International Energy Agency said this week that a “supply shock” will essentially change the way the oil market works — and with change come opportunities, analysts said.

The supply shock the IEA referred to in its Medium-Term Oil Market Report comes from a surge in North American oil production, which the Paris-based agency said will “be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15.”
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That sounds pretty impressive — and it is. It just wasn’t that much of a surprise for many.

“Is it spectacular? Yes, but not a surprise,” said James Williams, energy economist at WTRG Economics. “It’s like the 4th of July. You know the fireworks are coming but the display is still spectacular.”

“With North American consumption essentially flat, every barrel of additional oil produced here means less imported from the traditional sources of Latin America, North Africa and the Middle East,” he said.

Read Saudi Arabia on U.S oil boom.: Bring it on.

That can lead to many opportunities here at home — from the exploration and production companies contributing to the shale oil boom to builders and operators of pipelines and oil-storage facilities, analysts said.

After all, the North American oil supply boom is a big step toward the energy independence the U.S. has been striving for.

The IEA report offered more “insights that America is closer to oil and energy independence than ever before,” said John Person, president of NationalFutures.com.

“If we come close to these estimates in the next six to eight months,” that would be “extremely bullish for both consumers as well as the economy and might translate to an even better rate of return for the U.S. equity markets,” he said.

Non-OPEC supplies — supplies from producers who are not part of the Organization of the Petroleum Exporting Countries — are expected to grow by 6 million barrels per day to 59.3 million barrels per day in 2018 from 2012, the IEA’s report said. And about 65% of the growth comes from North American light, tight oil and Canadian oil sands production.

And that might even be an understatement.

“The IEA report focuses primarily on U.S. on-shore shale-oil production,” said Kirk McDonald, senior research analyst at St. Louis-based Argent Capital Management. “What they are missing is the simultaneous revolution in off-shore technology that is enabling the discovery and development of huge fields in the Gulf of Mexico.”

Those technologies include “improved seismic imaging, the computational power to process the images and the still-limited application of stimulation in off-shore fields,” he said.

“The U.S. led the on-shore revolution and now we are leading a second one off-shore,” he said, adding that this has the potential to grow non-OPEC supply.

Profit potential

Given all that, analysts had several suggestions for which companies have potential to profit.

“Investments to gain exposure to these higher production levels include [exploration and production] companies with higher exposure to the U.S.,” said Justin McNichols, chief investment officer at Osborne Partners Capital Management in San Francisco.

Examples of those, he said, include Hess Corp. HES +0.61%   and ConocoPhillips COP +0.53%

Among the drillers, Williams lists Schlumberger Ltd. SLB +0.51% , Halliburton Co. HAL +2.62% , Willbros Group Inc. WG -2.51%  and National Oilwell Varco Inc. NOV +2.82% .

“The unique characteristics of the U.S. and Canada with private ownership of mineral rights and low country risk will … serve to lower investment in drilling in riskier countries,” Williams said. “Companies that drill in the U.S. or Canada are not worried that the state will confiscate their wells as we have seen recently in Venezuela.”

Companies that build and operate pipelines and storage facilities are also likely to benefit from what the IEA referred to as the “supply shock.”

Hess Energy
Hess has made significant investments to develop the Bakken shale.

“We do not have the pipeline infrastructure to handle all of the oil from North Dakota and that means more pipelines and storage facilities,” Williams said. North Dakota, home to the Bakken shale formation, is among America’s top five oil-producing states.

Pipeline operators include TransCanada Corp. CA:TRP +1.36%   TRP +0.62%   and Kinder Morgan Inc. KMI +0.93% .

Companies that build refineries and manufacture parts should also benefit from the rise in North American shale oil production, said Williams.

The shale formations are producing a higher quality crude, he said, but some thought that higher quality crude would be in short supply so refiners in many cases re-configured their operations to handle lower quality, high sulfur heavy oil.

“Now instead of a shortage there is a surplus and over the next few years, we will like to see some of them reconfigure their facilities to handle the lighter oil,” he said.

As for oil CLM3 +1.01% , Argent’s McDonald simply said that “in short, the outlook for oil prices is bearish.”

But, as Osborne Partners’ McNichols pointed out, if crude input prices fall, refiners like Marathon Petroleum Corp. MPC +3.67%  will “eventually benefit.”

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