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Published On: Sun, Jan 20th, 2013

MOMENTUM IN ENERGY? UPSTREAM & DOWNSTREAM

USA, the world’s largest economy, is also the largest importer of oil. The gap between production and consumption in 2011 was around 8.8 million Barrels per day, with production being just 53% of consumption. This shortfall poses a strategic risk to the USA especially in the event import supply disruptions due to war or other such geo-political risk events.

However, this deficit in production which is likely to be around 37% even in 2040 presents a great opportunity for oil & gas exploration & production companies. Also, drilling / exploration techniques like horizontal fracturing are likely to enhance the efficiency & quantum of production giving impetus to growth on the supply side. Further, the growth in the US economy over the next few decades is likely to keep the demand for fuel, & consequently the price, reasonably high.

As per the AEO2013, real prices (in 2011 dollars) for motor gasoline and diesel are likely to increase from $3.45 and $3.58 per gallon in 2011 to $4.32 and $4.94 per gallon respectively in 2040. Importantly, the price of Brent Crude is likely to be around $ 163 per Barrel in 2040 (annual growth rate of 1.8%). In nominal terms this translates to a price of $269 per barrel.

oil graph

In the case of Natural Gas, at present the production consumption gap is significantly less. In 2011, while production was 23,000 billion CFT, the consumption was 24,326 billion CFT.  In fact, the USA is likely to be a net exporter of Natural Gas by 2020. Despite this increase in production, the prices of Natural Gas are, however, likely to increase from around $4 per million btu in 2011 to $ 7.83 per million btu in 2040 as lower cost resources are likely to be depleted and production will shift to less efficient resources. (source: AEO2013)

The increasing demand, perennial import requirement and upward price trends make the domestic outlook for the US oil & gas sector very exciting. As a long term equity investor, to participate & make the most of this growth story, one obviously has the choice of going in for the big boys or the small & mid-cap companies. Further, one also can opt for either investing in upstream drilling / exploration or downstream / retail oil & gas companies.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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