The Big Oil Squeeze

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Don’t give up on crude oil.

I know black gold’s roller-coaster ride has been a frustrating one for many investors. Oil crept back toward $50 per barrel in mid-August only to tumble lower again at the close of the month, but cost-saving decisions made over the past couple years as the commodity languished well below its peak are going to send oil roaring back in a big way over the long term.

As you likely know, oil companies need to constantly search for new oil supplies so that they can replenish what’s being consumed on a daily basis. And when oil companies stop discovering new sources of oil, it sets up for a potential shortage that could send the commodity’s price skyrocketing.

Since oil peaked in 2014 and turned sharply lower, the first expense oil companies cut to save their bottom lines was exploration. In fact, 2015 exploration uncovered only 2.7 billion barrels of oil — the smallest amount since 1947. This discovery is just one-tenth as much oil uncovered on an average annual basis since 1960.

And 2016 exploration looks even worse. Through the end of July, only 736 million barrels had been uncovered.

Of course, the problem isn’t that the oil isn’t out there. (At least, that’s not the problem yet.) It’s that companies aren’t looking. Global exploration spending was slashed to just $40 billion in 2016 compared to $100 billion in 2014, and experts believe spending will remain at that low level through 2018.

While oil companies are facing declines in oil-field discoveries each year as they cut costs, the Energy Information Administration (EIA) estimates that global demand will swell from 94.8 million barrels per day in 2016 to 105.3 million barrel per day in 2026.

So, in one hand we have shrinking supply, and in the other we’re looking at rising demand. That is a perfect storm to send the price of crude surging higher.

Sure, shale oil is going to help fill in the gaps, but remember that U.S. shale oil is expensive to produce, and with oil trading under $50, growth in that sector has pretty much stopped.

Jeff Opdyke has explained in the past that we are seeing a similar situation to what happened in oil during the late ‘90s, which led the price of crude to jump from the teens to triple digits. When the squeeze hits oil, you don’t want to miss out on the rally.

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