Fundamental changes in supply and demand have caused seismic shifts in the economics of oil and gas exploration and production. To understand how those changes will impact investors, it’s important look at how the drivers of the industry have changed.
Supply and Demand
For decades, oil prices were set by cartels like OPEC. But huge gains in production in the U.S. and other countries have changed that—possibly forever. Now prices are set largely by the open market instead of the whims of a few self-interested cabals. The fundamental economics of supply and demand are at work, and, as we have seen over the past year or so, when supply is abundant and demand is static or falling, prices tumble accordingly.
On the demand side, economic slowdowns in huge markets like China and Europe mean lower consumption of petroleum products, and marked increases in alternative energy sources in developed countries along with more efficient internal combustion engines add to softening demand. At the same time, new discoveries and better extraction technology has caused supply to increase dramatically, leading to $50 oil and squeezed or vanishing profit margins.
Going Forward
Absent intervention by cartels or governments to drive up prices or large increases in demand, neither of which seem likely, is there any money to be made in oil and gas in the near term? The answer is yes, if you know where to look, and that answer won’t be found on the price side, but in companies themselves.
In the face of price swings, wide-open competition, and economic uncertainty, energy companies will be challenged to adapt their business models to prosper in the uncertain environment that’s likely to persist. Some say for the foreseeable future.
With supply at roughly twice the demand in 2014, profits will be found in places far removed from the well head—places like engineering and marketing departments. Companies that find ways to lower the cost of exploration and production through efficiencies and technology will be able to make money vis-à-vis lowered costs. Leveraging current low prices to increase demand in new and emerging markets will add even more to the bottom line.
Big legacy companies will certainly move in these directions, but their very size could prevent changing quickly enough to lead to near-term profits. Smaller companies are more nimble and less resistant to change, and those who adapt can present real opportunities.
We Can Help
The oil and gas experts at BWAB track industry trends as we continue to identify hidden opportunities in oil and gas properties that offer excellent values for both institutions and individual investors. While others are preoccupied with negatives, we’re busy finding companies positioned to thrive in today’s volatile markets.
We invite you to visit our website, BWAB.com, to learn more about our investment strategy, philosophy, and proven record in maximizing investor returns by building value through capital reinvestment, operational improvements and enhanced recovery and cost control.
