Did U.S. Oil Break the World's Oil Benchmark?

The Brent Crude benchmark looks like it needs an overhaul, and the U.S. oil resurgence is playing a big part in that—consider buying in to this benchmark breaking region.

Mar 17, 2014 at 10:50AM

Oil is a globally traded commodity and Brent Crude is its benchmark. That's worked out well for decades, but new sources of supply and dwindling output from the North Sea are combining to make Brent a less valuable yard stick. The U.S. is a key factor in this dislocation.

Ups and downs
The Brent Crude benchmark is based on pricing for North Sea oil. Only output from the region is falling, increasing the importance of other areas. For example, some in the industry are calling for the inclusion of oil from Russia and West Africa, among others. The biggest risk of inaction is price manipulation, something that's already being investigated by European authorities.

Adding U.S. oil is another possible expansion of the benchmark. That's notable because the U.S. Energy Information Administration highlights increased U.S. output as one of the reason that Brent Crude traded in its narrowest range since 2006. Although there are material limits on oil exports in the United States, increased U.S. production, "helped offset some of the losses of oil on world markets, resulting in supply being more in line with market expectations." And, thus, prices were more stable.


That's possible because the United States has historically been a big importer of foreign oil. However, as more oil is found domestically, less foreign oil is needed. That leaves more oil for everyone else. This shift is highlighted by changes at large oil companies like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX).

These international oil giants have operations around the world, not just in the U.S. market. As less oil is directed to the U.S. market, they have shifted their businesses to supply more oil to other parts of the globe. For example, Chevron gets about a quarter of its oil from Asian assets. That's a big growth region. It's also why Exxon is working on new projects in places like China, Vietnam, Indonesia, and Australia. These companies are going where the demand is.

Going local
So buying a giant like Exxon or Chevron is one way to get exposure to U.S. and global oil markets—and they'll do just fine no matter what happens to the Brent Crude benchmark. However, there's also the option of buying American and benefiting from the other side of the equation—offsetting imported oil. For example, Linn Energy (NASDAQ:LINE) and Vanguard Natural Resources (NASDAQ:VNR) are two high-yielding limited partnerships focused on U.S. drilling.


(Source: Bmpeters, via Wikimedia Commons)

Both have grown through acquisition, targeting relatively mature oil and natural gas fields. Such properties have more predictable production profiles. Moreover, drilling new wells in mature areas tends to be less risky.

The big opportunity right now, however, is related to last year's concerns about Linn Energy's business model. That issue appears to have passed, but both Linn and Vanguard still sport yields in the 8% and 9% range.

If owning an LP isn't to your liking, then you might consider a largely domestic oil player like Occidental Petroleum (NYSE:OXY). Like Exxon and Chevron, Occidental has operations around the world, but about 60% of its production is located in the U.S. market. In fact, three of its four "focus areas" are in the United States.

Although Occidental's 3% dividend yield is much lower than Linn or Vanguard, it's in-line with those of Chevron and Exxon. The big difference between these giant's and Occidental is Occidental's focus on the U.S. market.

Breaking bad
The questions surrounding the validity of the Brent Crude benchmark are a statement about the changing oil landscape. The U.S. oil and gas boom will be a big part of the evolving picture. You can hedge your bets by purchasing giant oil companies that can shift production on a global scale, like Exxon and Chevron. Or you can jump into U.S. focused drillers, like Linn, Vanguard, and Occidental, that are helping to change the oil world as we know it.

The U.S. energy boom is bigger than just this one benchmark...

Have you missed out on the record oil and natural gas production that has been revolutionizing the United States' energy position? If so, it's not too late to start investing in it. For this reason, the Motley Fool is offering a comprehensive look at three energy companies with plenty of room left to grow. To find out which three companies we have identified, we invite you to check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information