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A Nasty Energy Bubble Where You’d Least Expect It

A week ago I told you that Exxon (XOM) had missed the boat on the shale revolution.

Anyone who thinks the oil behemoth can still punch its golden “shale ticket” better think again. Because now the shale industry itself is shifting.

As is the case with any boom, we’ve reached the end of the shootin’-fish-in-a-barrel phase. In other words, the easy profits are long gone.

From here out, only the best-positioned players will continue to prosper…

You see, the mania over the shale/tight oil revolution is taking on some unpleasant characteristics that may be signaling a bubble.

For proof, one must look no further than the recent downturn in reported earnings out of the oil majors. In fact, this sector-wide decline may mean it’s time for investors to cut down on their shale holdings.

Bubble Trouble
Two factors contributed to the beginning stages of this bubble: lower oil prices and the lack of feasibility for many tight oil projects.

As you can see in the chart below, not only has U.S. oil production increased by a whopping 46% since 2011, but production has increased globally with the help of Iraq, Libya and Iran.

But since the global demand picture looks rather flat, the situation is hammering oil prices lower.


So, while production is set to plateau by 2020, it may drop off even sooner if oil prices crash.

That means, in the short term, the picture is bleak for those expecting $150-per-barrel oil to return. Chances are, we’ll see $80 before we see $150 again.

In the long term, however, the picture for oil is still bullish. That is, as long as shale oil production remains feasible…

Beware the Inflection Point

Oil majors are learning quickly that there’s a difference between recoverable oil and technically recoverable oil.

Shale oil acreage is being sold at much lower prices recently, as oil majors realize the lack of feasibility of some of these regions. As doubt grows and convenience lessens, additional pressure threatens to smother oil prices.

Already, we’ve seen some correction in shale oil plays reflective of this – like in Pioneer Natural Resources (PXD), which has seen its share price fall from over $227 in October 2013 to below $170 in February 2014.

And yet for now, I suspect shale oil isn’t going anywhere.

As long as oil prices remain stable, there’ll be profits to be made – by big and small players alike.

But investors beware: As with all booms, there will come an inflection point… and oil majors who intend to survive should be looking ahead with caution.

Because as the past has proven, bubbles have a habit of interrupting the momentum of not only companies, but entire markets.

And “the chase” continues,

Karim Rahemtulla