The "supply shock" erupting from the North American shale oil
boom will have profound effects for global energy markets, says
the International Energy Agency.
In its "Medium-Term Oil Market Report" released Tuesday, the
IEA said the production onslaught will have impact on the oil
market over the next five years as much as swelling Chinese
demand did over the past 15 years. What's more, it will force
companies to change how they transport, store and refine oil in
addition to their investment strategies.
The IEA's announcement coincided with a rally in oil and gas
exploration and production
bet the shale boom will certainly be a boon for some ETFs and a
bust for others.
"Essentially the report corroborated what has been postulated
in the market for the past year," Stephen Schork, founder of "The
Schork Report," specializing in energy markets.
Key Facts From The Report
The report stated:
1. North American oil supply is projected to grow by 3.9
million barrels per day from 2012 to 2018, accounting for more
than half of the (non-OPEC) increase.
2. Emerging markets are projected to overtake developed
countries in oil product consumption by the second quarter of
3. Developing countries, which accounted for 49% of global
demand in 2012, will account for more than 54% by 2018.
4. The average cost of oil imports will fall from $109 a
barrel in 2013 to $93 a barrel by 2018.
5. Global demand will rise from 89.78 million barrels a day in
2012 to 96.68 million barrels by 2018, up nearly 8%, assuming
global economic growth of 3% to 4.5% annually.
6. Non-OPEC (Organization of the Petroleum Exporting
Countries) oil supplies are seen rising from 59.66 million
barrels a day in 2012 to 66.30 million barrels by 2018, an 11%
Here's a look at potential winners and losers in the
Major Oil Services Firms
The big winners of the shale boom will be major oil services
and independent service operators, or ISOs, such asSchlumberger (
) andBaker Hughes (
), which have billion-dollar research and development budgets,
says John Graves, author of "Fracking, America's Alternative
Energy Revolution" and an asset manager based in Ventura,
All three companies are heavily overweighted in iShares Dow
Jones U.S.Oil Equipment Index (
),Market Vectors Oil Services ETF (
), which climbed 0.54% and 0.34%, respectively Tuesday.
Graves is also bullish onExxon Mobil (XOM),BP (BP),Chevron
(CVX) andStatoil (STO), which he believes have "the staying power
to outlast regulatory or governmental interference."
IShares S&P North American Natural Resources (IGE),
iShares Dow Jones U.S.Energy (IYE),Energy Select Sector SPDR
(XLE) andVanguard Energy ETF (VDE) heavily overweight Exxon and
Chevron and offer some exposure to Schlumberger and Halliburton.
IGE, IYE, XLE and VDE jumped 0.96% to 1.42% Tuesday.
North Dakota and Montana are home to the 20th largest crude
oil reserve in the world, said Schork, citing data from United
States Geological Survey. This calls for expertise from
unconventional, shale oil and Canadian oil sands producers, such
as those found in Market Vectors Unconventional Oil &Gas
(FRAK), up 1.02% Tuesday, andSustainable North American Oil Sands
(SNDS), up 0.18%.
Master Limited Partnerships
The North American shale oil boom not only impacts the economy
and energy market but also related industries engaged in global
transportation, storage and refining infrastructure, the IEA
report said. U.S. midstream companies -- most of which are Master
Limited Partnerships, or MLPs -- are boosting their transport and
storage capacity in the U.S. to support the rising oil and gas
The most widely traded exchange traded product in this area
isJPMorgan Alerian MLP Index ETN (AMJ), which fell 1.04% Tuesday.
The drawback is that as an exchange traded note, investors have
to rely on the issuer to make good on its debts and it doesn't
actually hold the underlying stocks. It also currently trades at
a premium to its net asset value because the issuer has limited
the number of shares that can be created.
ALPS Alerian MLP ETF (AMLP), down 0.05% Tuesday, offers
exposure to the underlying stocks but it is structured as a
corporation, which means it has to pay taxes that take a bite out
of total returns.
Transportation And Shipping
There will be a tremendous need for railroads to transport the
oil and gas from the inland to the major ports for export, says
Schork.IShares Dow Jones Transportation Average (IYT) offers more
exposure to railroads than its competitorSPDR S&P
Transportation (XTN), which is more heavily weighted in airlines
Tanker shippers, foundGuggenheim Global Shipping (SEA), will
be re-routed. Instead of coming to the U.S. to import oil, they
will be exporting oil from the U.S. to Asia, mainly China.
In the U.S., natural gas has displaced a third of coal usage
at electric power plants in less than a decade and this trend
will likely spread internationally, says Graves. This should
explain whyMarket Vectors Coal ETF (KOL) has lost an average 15%
a year the past five years.
An onslaught of supply will most likely depress oil prices.
Oil prices will sink an average of 5.5% between now and 2018, the
"As global refining capacity expansions outpace upstream
supply growth, let alone demand growth, margins and utilization
rates will come under pressure and higher-cost refineries will
face increasingly strong competitive headwinds," the report said.
"European refineries are at particularly high risk of closure
over the forecast period (2012 to 2018)."
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