How Can You Make Money on Oil These Days?

The bottom fell out of the oil market in the middle of 2014 as supply greatly exceeded demand. The price of crude oil fell from more than $100 a barrel to less than $30 a barrel by the end of 2015. Although crude is back in the $45 range producers are hurting across the globe and investors have fled oil stocks. How can you make money on oil these days with a weak global economy and too much oil being pumped? Fortune reports that there may be an output cut by OPEC and the news drove oil prices up by 8%.

Oil prices jumped more than 8% on Wednesday to a five-week high as newswires reported that the Organization of the Petroleum Exporting Countries had agreed its first oil output cuts since 2008.
An OPEC source told Reuters on Wednesday that the cartel, which produces one-third of the world’s oil, had firmed up an agreement in line with a tentative deal reached in Algiers in September. That would involve cutting output from a current level of around 33.6 million barrels a day to somewhere between 32.5 million and 33 million.

Will the cuts by OPEC producers stick? Will non-OPEC producers like the USA, Russia and China simply pick up the slack? If OPEC is able to decrease production from 33.6 million barrels a day to 32.5 million barrels it could erase the daily oil excess within a year and drive prices up. However, the sum total of daily production by Russia, the USA, China, Canada, Brazil, Mexico, Colombia, the UK and Norway is 33.8 million barrels. US oil production went up 50% from 2009 to 2015 due to fracking technology. But fracking is a much more expensive way to produce oil and many operations closed when prices fell. US oil production has fallen by more than 12% in the last two years. If OPEC reduces production and prices rise it is likely that other producers, most notably US fracking operations will resume higher production. Importantly fracking technology keeps improving and has increased production per well as efficiencies drive costs down.

U.S. Shale Oil Industry

At the start of 2016 the U.S. Federal Reserve looked at productivity improvements and cost declines in U.S. oil shale production.

Oil prices have declined by roughly 70 percent since peaking in the middle of 2014. The U.S. oil rig count-a common measure of drilling activity-peaked in late 2014 and has since declined by about 60 percent. Yet U.S. production of crude oil continued rising until the middle of 2015 and has since fallen by only 6 percent from its peak. The dramatic advance of U.S. oil production seen in the last decade-driven primarily by new discoveries of shale oil and innovation in drilling and extraction technology-has not been as responsive to the deterioration of oil markets as some analysts predicted.

It turns out that extraction per well is more efficient with newer technologies allowing extraction of twice as much oil per day per well compared to just a decade ago. Drilling of new wells has dropped off by as much as 60% but current wells are still producing. The breakeven point for a high producing well is $30 a barrel and $50 a barrel for a moderate producing well. Thus a small increase in oil prices will drive up profits for fracking operators. When profits go up drilling for new wells will resume. Where to make money in oil these days with the promise of higher prices could well be with oil drilling companies and companies using the high tech fracking technology.

How Can You Make Money on Oil These Days? PPT

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