I’m about to tell you everything you need to know about U.S. energy production…
It’s going to be quick, simple and profitable.
In fact, it can really be boiled down to one easy-to-remember mantra: Oil is today, natural gas is tomorrow.
This information alone can help you achieve market-beating returns over the next 10 years.
The Two Things You Need to Know
You no doubt know that through the modern day miracle of fracking, the United States is producing more fuel than it ever has. I’m talking specifically about oil and natural gas.
Domestic oil production increased to 7.5 million barrels per day (bpd) in July, the highest level in more than 20 years, according to the Department of Energy. And depending on how productive our wells turn out to be, that figure could rise as high as 11 million bpd by 2019.
Meanwhile, natural gas production, which has set records in each of the past two years, is poised to continue to climb this year and next.
In its August Short-Term Energy Outlook, the EIA said it expected marketed gas production in 2013 to rise 710 million cubic feet per day to 69.89 billion cubic feet per day. Domestic output in 2014 is expected to set another record, rising 70 million cubic feet to 70.46 billion cubic feet daily.
That’s the first thing you need to know. The second thing is that, right now, gas prices are low and oil prices are high.
Oil prices are close to 52-week highs today, over $105 per barrel. But natural gas prices have been cut in half over the past few years, tumbling from $6 to $7 per thousand cubic feet (mcf) to about $3.50.
Now, it costs close to $4 per mcf or more to get the natural gas out of the ground. And it costs anywhere from $80 to $90 per barrel to make drilling for oil in tight rock formations profitable.
Clearly, oil is the place to be right now.
So in response to the changing market dynamics, energy companies have shifted their onshore operations to focus on crude and natural gas liquids (NGLs).
In 2009, almost 80% of U.S. rigs were drilling for natural gas, and 20% were targeting oil. But in 2012, that ratio had reversed to 60% oil and 40% natural gas.
So, as an investor, what are you supposed to make of this?
Exactly what I told you at the beginning of this article: Tight oil is the big play right now. But natural gas is the future…
Translating Trends to Market-Beating Returns
Oil prices will eventually come down. They won’t crash. They’ll simply slip to $90, $80, or even $75 per barrel as U.S. production increases. And that’ll make it much less profitable.
And as that happens, natural gas prices will rise, eventually climbing back to about $6 or $7 per mcf. It’s just going to take a little bit of time for demand to catch up with supply. But it’ll happen.
Remember, natural gas is quickly taking over as the United States’ principal source of energy. That is, natural gas now accounts for 30% of U.S. energy production, up from 18% just a decade ago. It’s been edging out coal, which has seen its share of U.S. energy production shrink from 50% to 37% in that same period.
Not only that, but there’s also a growing number of motor vehicles running on natural gas, instead of traditional gasoline.
Both of those trends will continue, because natural gas is simply cheaper and cleaner.
Still, that’s a long way off. So in the short term, investors should still be focused on oil.
The smaller players got there first, and that’s where you should be focusing your investment attention. I’m talking specifically about EOG Resources (EOG) and Continental Resources (CLR), two of the biggest “small” players in the region.
It’s no surprise that both companies are trading close to all-time highs, and production forecasts for both companies are increasing.
And Continental Resources is another strong player. Both should continue to outperform the market.
I talked extensively about these two companies earlier this week. Chesapeake just set another 52-week high after reporting solid earnings, and Basic Energy is scaling back a bit after taking a 50% jump earlier this year.
Together, these four plays will help you beat the market for the next decade.
Just remember what I told you today.
And “the chase” continues,