US Energy Revolution: Below $3 at the Pump?

The United States is in the midst of an energy revolution. Energy Information Administration (EIA) chief Adam Sieminski said in an interview Wednesday Sept. 24, that without U.S. shale production, oil could be $150 per barrel. While at some point unrest in the Middle-East would send oil prices higher, that time is not now. As of the end of 2013, the United States now accounts for a staggering 10% of the world's oil production. US crude imports fell 1.2 million barrels per day to 6.5 million bpd, the lowest level since May 16, 2014. As the United States cuts imports from countries like Angola and Nigeria, those producers instead sell to Asian markets at a steep discount. This is one of many examples of how new shale technology has exerted downside pressure on the cost of oil around the world. WTI Crude has moved in three months from $104.44, the high in June 2014, to $92.33, the low on Sept. 26, 2014.

Texas is home to two of three of the nation’s biggest shale oil drilling operations. Texas produced a whopping 3 million barrels per day in April of this year, the most since January 1981 when the EIA started reporting each state’s monthly oil production. The most recent international oil production from December ranks Texas as the eighthlargest producer in the world if it were its own sovereign nation.

Source: EIA (accessed 09/26/2014)

Estimates indicate that the United States could be oil-independent in a decade. The oil coming out of shale, known as condensate is so pure it needs very little refining before getting to your tank. This has allowed refiners to yield more products even at refineries that are not perfectly set up to take full advantage of the oil. Horizontal drilling and hydraulic fracturing, techniques have lowered the country's dependence on imported oil by more than a third in recent years.

The demand for gasoline in the United States is falling while inversely the production of oil has made great strides. According to the Federal Highway Administration, motorists drove an estimated 266.8 billion miles on U.S. roads in July 2014, up 1.5 % from the same month one year prior. However, gasoline demand still fell as better fuel efficiencies and alternative fuels curtail the overall demand for gasoline. To illustrate this point: the EIA reported that last year we used around 8.8 million barrels per day of gasoline; 4.4% less than the 10-year high of 9.2 million bpd seen in 2006.

Lower prices at the pump will provide relief to individuals but also to companies that will help drive the U.S. economy forward. As you can see from the chart below, the current trend is pointing to cheaper gas at the pump. With more oil above ground than ever before, we can all look forward to seeing cheaper prices at the pump. In terms of trading the futures markets, I am looking for opportunities in the energies as I expect more downside in the future. Even though futures prices may have already factored in seasonal aspects of supply and demand, gasoline prices tend to be negatively affected in the fall. For these reasons, I am looking for prices below the $3 level at the pump in the short term.

Source:  http://www.gasbuddy.com/gb_retail_price_chart.aspx?time=24  (accessed 09/26/2014)

About the Author

Jack Malone is a Futures and Options Advisor at RCM Asset Management with a focus on the metals and energy markets. Jack can be reached at jmalone@rcmam.com