Oil prices were falling before Old Man Winter arrived with a vengeance, and could begin easing again once spring arrives. That is as rising supplies in the United States have calmed concerns about periodic disruptions to international pumping operations.
Notably, the extra oil being pumped stateside has resulted in a bifurcated market. Domestic crude oil prices no longer move in lockstep, as they did for decades, with international oil prices, as measured by the Brent oil price marker. The divergence is largely owing to the revolution in shale-drilling technology that has dramatically boosted access to formerly uneconomic North American oil reserves. The fresh river of oil stateside means the periodic disruptions, and threats thereof, to drilling in strife-torn nations affect now Brent prices to a greater extent than West Texas Intermediate prices. To illustrate, fears of intervention in Syria last summer caused a steeper spike in Brent prices than West Texas crude oil quotations.
The changing market dynamics are apparent in more random oil price fluctuations. For example, the Brent benchmark averaged $108.71 a barrel in 2013, down 2.7% from the prior year, while the 2013 average for WTI rose 4.1%, to $98.03 a barrel. Notably, those price moves were tame, as a more than one million-barrel-a-day rise in production from the United States offset the collapse of oil exports from Libya, as well as declines in volume pumped from Iran and Syria.
Toward the end of 2013, the prospect of the return of supplies from South Sudan and Libya, plus reduced tensions with Iran, took some of the heat off of international oil prices. Meantime, improving demand stateside helped push up the average WTI price. Indeed, the U.S. Energy Information Administration noted that domestic oil demand rose to a five-year high in October.
Going forward, there are indications that global oil demand will rise at a healthy clip in the year ahead. According to the Paris-based International Energy Agency (IEA), worldwide consumption is set to rise by a solid 1.2 million barrels a day in 2014, driven by global GDP expansion.
However, supplies may increase at an even more rapid 1.7 million barrels a day, according to the IEA. Leading the charge is the United States, where fields in Texas and North Dakota are being tapped to a greater extent. The U.S. is on course to pump more oil than it has in 25 years. The bigger concern for prices is if substantial amounts of sidelined oil resume flowing from Libya, and if Iraq ramps up its output materially. Iran’s oil probably won’t begin to flow more meaningfully for quite some time, perhaps a year or two, though, despite the recent agreement by that nation to curb its nuclear program.
As far as stocks go, shares of a number of oil-related names have come off their highs as oil prices have eased. Those include Apache Corp. (APA), Continental Resources (CLR), Halliburton (HAL), and Schlumberger (SLB). The pullback presents a better long-term buying opportunity. Meantime, companies that tend to benefit from a wider differential between the price of Brent oil and WTI include those of refiners, such as Valero Energy (VLO) and Marathon Petroleum (MPC).
Lastly, while oil prices could come under pressure once cold weather-related demand eases, we don’t look for too drastic a slide since, unfortunately, the chances of everything going smoothly in the many volatile Middle Eastern and African producing nations seem slim. Sporadic disruptions to overseas pumping sources are par for the course in the oil business.
At the time of this article, the author did not have positions in any of the companies mentioned.