Oil Prices Are on the Rise, and That Could Be Cause for Concern

You likely have noticed a steady run-up in crude prices during 2014. Are there identifiable reasons for the hike? What do they mean for your portfolio?

Feb 23, 2014 at 2:00PM

Could we be seeing the emergence of concerns about our long-term domestic energy viability? With a minimum of fanfare, the price per barrel of light sweet crude has moved up steadily during 2014 from the low $90s to near $102.50, a change of more than 10%.

There are several possible causes for the hike, including unseasonably frigid weather across the U.S. and a sinking dollar (itself hit by a plethora of soft economic indices). Then there are solid credit growth numbers from China and a new pipeline connecting the crude oil hub at Cushing, Okla., with Gulf Coast refineries. Any or all of these factors could -- at least for a while -- be pushing prices to heights that represent the polar opposite of predictions by a host of energy seers.

Is the peak oil notion back?
Or, it just might be that emerging doubts about the longevity of the U.S. oil boom are beginning to be felt. Of course, these trepidations aren't exactly brand new. Indeed, last summer Forbes magazine quoted none other than then-retiring EOG Resources (NYSE:EOG) CEO Mark Papa as maintaining that the boom is "not going to be as massive as people think."

Papa is as good a source as there is. In the decade-and-a-half since it was jettisoned by Enron, EOG has, mostly under his direction, become both a leader in North Dakota's Bakken shale and the discoverer of the now-prolific Eagle Ford in south Texas. The company, which will report its final 2013 results next week, has returned more than 650% to shareholders in the past decade and, through last year's third quarter, had boosted its U.S. crude and condensate production to 228,000 barrels per day.

A sharp acreage price slide
Nevertheless, despite its technological supremacy -- including the development of an upgraded approach to fracking -- even EOG probably won't be able to produce more than 8%-10% of the oil located beneath its Eagle Ford acreage. And while it wasn't more than a couple of years ago that producers were grabbing acreage in that play at almost any price, those days have definitely disappeared.

In fact, nearly a year ago, Hess (NYSE:HES) sold about 43,000 Eagle Ford acres to Sanchez Energy (NYSE:SN) for $265 million. That was a bargain price for Sanchez, which is doing nicely with the properties. But it was also about $800 million less than Hess shelled out for the same assets not long before.

Beyond that, all is not completely well in the Bakken. While the formation's total production continues to expand as more wells come online, the average output per well has been moving in the opposite direction. The latter figure hit a high more than two years ago with a rate of 144 barrels per day. Through the middle of 2013, the average had slid by 12%.

A thirsty way to produce oil and gas
While it affects the Eagle Ford to a far greater degree than the Bakken, there's also rapidly increasing concern about the water used in fracking. I'm not referring to the normal worries about contamination, but to the volume of water needed to blast open shale fissures in order to induce production.

After all, Texas remains in the throes of a decade-long drought. As such, with fracking competing with agriculture for scarce supplies of agua, oil production ultimately could be affected negatively.

The same is true for Colorado and California. And with a single well often requiring millions of gallons of H2O for the completion of a frack, the problem is anything but trivial.

According to a recently completed report on fracking and the water scarcity phenomenon -- which was described to Fools earlier this month -- fully three-fourths of the more than 39,000 wells hydraulically fractured in the U.S. during a 29-month span ending in May 2013 occurred in areas of insufficient water availability.

The same report noted that, of all the companies involved in U.S. fracking, Anadarko Petroleum (NYSE:APC) has drilled the highest proportion of wells (70%) in water-short areas. Anadarko, which is active in the Eagle Ford, the Permian Basin, and the DJ Basin, among a host of other international and domestic plays, reportedly used more than 6 billion gallons of water during nearly two and a half years of the study that led to the report.

The takeaway
There are other factors that could affect the future of fracking, obviously including a coming Environmental Protection Agency report on the practice. My conclusion about all of the issues noted in this article, though, is that, while crude prices may well sink beneath their current levels, a significant and prolonged slide is unlikely. That, to my way of thinking, renders energy stocks an ongoing must for well-balanced portfolios.

OPEC's worst nightmare
If, in fact, rising crude prices are making energy companies even more attractive than they already were, Fools would be well advised to scour the sector for the most compelling names. An exclusive, brand-new Motley Fool report reveals a company we're calling OPEC's Worst Nightmare. Just click here to uncover the name of this industry-leading stock, and join Warren Buffett in his quest for a veritable landslide of profits!

David Smith has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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