Texas Shale Oil Is Booming: Is the Bust Next?

David Fessler By David Fessler
Energy and Infrastructure Strategist

Oil & Gas

If you have your commercial driver’s license, I have a job for you…

And if you don’t, I have an investment opportunity for you.

Right now, CDL classes in Texas and New Mexico are packed. Being able to drive a big truck there is a ticket to riches.

It’s no wonder…

Midland, Texas, is right in the heart of the Permian Basin. And the Permian is the most prolific oil shale basin in the U.S… and the world.

In July, Permian crude production averaged 3.4 million barrels per day (bpd). If the Permian were a country, it would be the world’s third-largest crude oil producer, surpassing both Iraq and Iran.

Five years from now, that number could hit 5.4 million bpd. How can that be possible?

By injecting a whopping $308 billion in upstream spending… in order to drill, complete and bring online another 41,000 wells.

Several oil companies that have focused on the Permian are profiting big-time. Take Pioneer Natural Resources (NYSE: PXD) for instance.

Since February, it’s been unloading all of its non-Permian acreage and infrastructure. It wants to focus all of its capital expenditures and attention on its Permian properties.

Pioneer isn’t alone in this “all-in on the Permian” strategy. Several other independent producers are doing the same thing.

Though there are a few short-term opportunities here, history teaches us another lesson.

Oil booms tend to be followed by oil busts.

I don’t mean to throw water on a newly hired commercial driver’s dreams… or the idea of investing in Permian oil producers…

But I will.

The bust is coming. And when the music stops, you’ll want to be right in front of a chair.

As my colleague Rick Rule has been known to say, “The cure for high prices is high prices, and the cure for low prices is low prices.”

When oil prices get too high, users cut back. People carpool or buy smaller cars.

A surplus of crude develops. Its price drops, along with the share prices of crude producers.

Crude is then cheap. Its use gradually starts to increase, exceeding available supply.

Prices increase, along with the share prices of oil producers… and we’re back where we started.

So what could possibly send oil prices to sub-$50 levels? We would need an increase in supply and/or a decrease in demand.

Here’s how I think it’s going to play out…

  • The U.S. will eventually reach an agreement with Iran, and sanctions will be lifted. That will increase world production.
  • U.S. producers will continue to increase production.
  • China, the world’s second-largest user of crude, will eventually start to cut back. China is electrifying all of the buses in its cities. This will cause a significant drop in Chinese demand for crude.
  • Entire countries are banning the sale of internal combustion engine vehicles, which will also lower the demand for crude.

Short term, there are some great moneymaking opportunities in the oil patch. Just keep one eye on the supply-demand balance for global crude oil.

You don’t want to be the last man standing when the music stops.

Good investing,

Dave