Investors have poured billions of dollars into energy exchange-traded funds, or ETFs this past quarter. Overall, investors sent seven times as much money into energy ETFs this quarter compared to the prior quarter. So, that begs the question, why are investors so bullish on energy these days?
America's energy boom is real
One reason for the massive inflow into energy ETFs could simply be that investors are starting to realize that America's energy boom is still just getting started. While we're already the world's top natural gas producer, we're expected to top Saudi Arabia and Russia in oil production next year. That game changing growth isn't expected to slow down until at least the end of the decade.
The technological advances of hydraulic fracturing when combined with horizontal drilling ignited a boom that has fueled the rise of companies like Chesapeake Energy (CHKA.Q) and EOG Resources (EOG 2.47%). Chesapeake Energy has grown from a $50,000 start-up by two Oklahoma wildcatters into America's second largest natural gas producer. Meanwhile, EOG Resources has emerged from the ashes of Enron to become one of America's fastest growing oil producers. It's expected to be America's top oil producer by 2018, while it wasn't even in the top five just last year.
The next wave of technical advances led by a combination of multi-well pad drilling and downspacing is taking Chesapeake, EOG and the industry as a whole to the next level of production growth and returns. Downspacing, or the number of wells a company can drill in each section without interfering with previously drilled wells, is enabling energy companies to recover more oil from shale resources. This advancement alone pushed EOG Resources' potential oil and gas recoveries in the Eagle Ford Shale up four-fold since 2010. The company now expects to drill upwards of 16 wells per section, up from just five in 2010. Meanwhile, multi-well pad drilling is enabling Chesapeake Energy's Eagle Ford well costs to fall from $10.1 million a few years ago to just $6.4 million this year, while its drilling time per well will improve 20% this year. That's enabling the company to do more with less money to improve its financial returns.
Russia could change our energy policy
All those advances aside, another reason why investors are growing particularly more bullish on the energy sector is because energy prices could begin to increase. Not only is the American economy improving, but our production windfall has many seeing oil and gas becoming a political weapon to be used against Russia.
Not only are additional natural gas export terminals being approved, but some are now pushing for America to end its four-decade old ban on exporting oil. Top Bakken Shale leaseholder Continental Resources (CLR), for example, is pushing for America to end its export ban as a way to put pressure on Russia. Some investors are betting that this will happen.
Not only that but many see surging U.S. light oil production from the Bakken and Eagle Ford overwhelming refineries because our refineries are simply not equipped to handle all of the volume of light crude oil we're producing. Some suggest that we can overcome that issue, capture higher global oil prices and show Russia we're the new oil king by simply exporting our surging oil production.
This one-two punch of short-term catalysts and long-term growth is likely the reason why investors are piling into energy ETFs these days. While the short-term catalyst might not emerge as quickly as investors hope, the long-term nature of America's energy boom still remains as the perfect spot for long-term wealth creation as shale focused producers are making a mint even at commodity prices well below the rest of the world.