The Oil Enigma
Is Big Oil on the rebound?
That’s the question on many folks’ minds this week as oil prices appear to be on the rise.
This week’s rise in oil stems from a trifecta of factors. First off, OPEC continues with their production cutbacks. Reuters reports:
“Saudi Energy Minister Khalid al-Falih said OPEC and its partners were ‘taking it easy’ in response to a tweet from Trump on Monday that called on the group to slacken its restrictions on crude production.”
Additionally, a surprise drawdown in U.S. oil supplies is also impacting prices this week. OilPrice.com reports:
“The American Petroleum Institute (API) reported a surprise draw in crude oil inventory of 4.2 million barrels for the week ending Feb. 22, coming in under analyst expectations that predicted that crude oil inventories would build by 2.842 million barrels.”
Rounding out the trifecta of tail winds is renewed confidence in global trade. OilPrice.com also reports:
“Oil Prices Could Soar on Trade War Truce.”
For now these tail winds are working for Big Oil. But we have to wonder if the rise in prices is sustainable.
Simply put, we have two major oil-producing entities with fundamentally different ideas about world oil supplies.
On one hand we have the U.S. rapidly moving into the net exporter category and hell-bent on producing as much oil as possible. On the other hand we have OPEC, which in light of the U.S. output is drastically slowing down production to keep prices higher.
You would think both entities have a vested interest in higher oil prices. But there are other political-economic factors at work too. There are also technological factors.
America’s New Dominance
America’s newly found domination in the oil game can’t be overstated. And this new leverage among world energy providers is specifically due to increased yields from the Permian Basin.
In the past, oil rigs were assembled to tap one well at a time. When that well went dry the rig would be disassembled and moved to the next drill site. Now, using advanced technologies, drillers can set up one rig and tap multiple wells at the same time.
The amounts of time and money saved by this new type of oil rig are incredible.
Additionally, advanced AI-powered mapping equipment allows U.S. drillers to find new oil wells with pinpoint accuracy.
Reducing costs without impacting production is the perfect recipe for profits for U.S. oil companies in that region.
The Best Way to Play Oil’s New Reality
Cracks are showing in OPEC.
Qatar is out, serving their self-interests and focusing on natural gas. Other countries could also exit the cartel as oil prices continue to hit resistance on the upside.
We know that Saudi Arabia is striking deals to expand global exploration in other regions of the world. A sign that they may be nearly out of crude reserves.
And as the world’s largest oil supplier throws its weight around the globe, companies like Royal Dutch Shell, BP and Exxon Mobil could suffer as a result.
But back in the U.S. I expect many small-cap and midcap companies operating in our Permian Basin region to do very well in the future. Unlike Big Oil and OPEC, smaller Permian drillers are using state-of-the-art technology to keep costs down and production yields high.
This is recipe for disaster for OPEC and Big Oil. But a boon for the U.S. and West Texas oil companies.
For my money, the most straightforward way to tap into the States’ newfound energy dominance is with the PowerShares Dynamic Energy Sector Portfolio ETF (NASDAQ: PXI).
PXI is a great way to gain exposure to U.S. companies in the energy production and exploration space.
These stocks took a beating during the fourth quarter — yet most are posting strong comeback moves to kick off 2019 trading.
Turning to the chart, you can see how PXI bounced off deeply oversold levels in January. PXI is now more than 20% from its lows. It even jumped above its 50-day moving average two weeks ago for the first time since October:
Currently we’re seeing a bit of upward resistance at $32. But the stock is “coiling” nicely right now, which could mean a breakout is coming soon.
If you believe in West Texas crude, you should believe in this ETF too.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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