From Peak to Shale

Andrei Voicu24Is energy independence for real?

Not long ago, peak oil theories dominated the headlines. Peak oil advocates believed that the upper limits of oil production would soon be reached and quickly be followed by a terminal decline. Based on such predictions, various apocalyptic social and economic scenarios started to emerge.

Since then, we have learned that the direst of peak oil’s predictions need to be pushed back much further into the future. The combination of stubbornly high oil prices, turmoil in the Middle East, as well as demand shifts in Asian markets helped ignite new technologies that unleashed an American energy supply revolution.

20130528_CrudeChartSource: Baker Hughes; BP; Citi Investment Research and Analysis

The IEA estimates that due to its increased production, North America will need to import 40% less oil by 2018 despite growing global demand[1]. The United States looks to be on its way to energy independence through a combination of increased production of shale oil and natural gas.

Origin of North American Crude Imports 2012/2018

Source:  IEA, May 2013

At the local level, in the greater Pittsburgh region, we are all familiar with the unprecedented developments fueled by the Marcellus shale natural gas production. A similar story has developed In North Dakota around shale oil production. These dramatic turns of events have far reaching geo-political and investment implications.

How can these trends help to benefit our investments?

At Fragasso Financial Advisors we are actively and continuously researching new investment opportunities on behalf of our clients. We believe it is important to keep you well informed on how we steer your investment portfolio(s) towards meeting your long term financial goals.

The main investment implications of the resurgence in North American oil and natural gas production could be summarized under three broad themes:

1)      Oil and gas supply increase results in demand shifts for transportation, storage and refining

  • As imports from overseas decline, pipelines may benefit at the expense of ocean tankers
  • US refineries may benefit from economies of scale and high quality crude at lower prices
  • Storage and pipeline companies may benefit from rapid expansion and tax incentives

Investment implications:

We seek opportunities to capitalize from domestic crude differentials and growing economies of scale in the refining market. We also seek to participate in the potential growth of the pipeline transportation business

2)      Companies involved in unconventional extraction technology may experience further growth

  • Potential tapping of shale gas and oil in Latin America, Russia and China
  • Fracturing technology may enhance recovery in mature conventional fields
  • Potential reassessment of global reserves

Investment implications:

Companies directly involved in the exploration and extraction of shale oil and gas are not currently generating profits from these activities because of the major capital expenditures they are required to make. No one knows for sure how much shale oil and gas China has, or what the global regulatory environment will ultimately look like.

To prudently benefit from the growth in this field, we believe it is important to refrain from going all in on a “science experiment.” We advocate employing a diversified approach and utilize a basket of opportunities that may benefit from the overall trend. For a more focused approach, we favor zeroing in the “picks and shovels” of the shale rush: refineries, pipelines and storage facilities.

3)      Chain reaction consequences to the economy at large

  • The US energy supply revolution helps accelerate an industrial resurgence
  • Growth opportunities in petrochemical manufacturing in the US
  • Potential adverse effects on the competitiveness of European petrochemical industry

Investment implications:

Given the growing trend of manufacturing resurgence, portfolios could benefit from a relative tilt towards the industrial domestic sector.  We are selectively seeking opportunities in the petrochemical industry.

Actual investment implementation methods vary from case to case. Portfolios are customized to fit the specific objectives of individual clients. Your financial advisor stands ready to provide you with the specifics of your situation.

If you find that our methodology of actively seeking to adjust your portfolios holdings to major economic and technological shifts is helpful, please don’t keep us a secret. We have the experience and know how to also help other people or organizations you care about.

We appreciate your business.

Andrei Voicu is Chief Investment Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at  Andrei can also be reached for comment at 412-227-3200.


[1] The IEA estimates that global demand for crude oil will grow from 89.8 million barrels per day in 2012 to 96.7 million barrels per day in 2018.

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