Why OPEC Is Running Scared


OPEC is a name that has always commanded a mix of fear and respect among investors in the energy sector.

Even many average Americans still vividly remember OPEC’s 1973 oil embargo — which led to lines at gas stations that reached around the block, and oil prices that soared nearly 500%.

More than just a temporary inconvenience that drove up prices at the pump, that 1973 embargo nearly destabilized the entire world economy.

Governments had to take swift action to secure alternate energy sources and avoid what could’ve become a sweeping global recession.

The embargo made it crystal clear that as long as OPEC — the Organization of the Petroleum Exporting Countries — controls the supply of oil, it controls the price of oil … the availability of oil and gas … and to a large extent, the whole global economy in turn.

But it’s not 1973 anymore.

And today the cartel’s control over the oil market isn’t as absolute as it once was, or as they’d have you believe it still is.

In fact, OPEC is actually running scared from a breakout oil-producing nation that’s taking over the global market…

The United States of America.

Ruining OPEC’s Fun

We Americans have always excelled at ruining other people’s fun — or as economists call it: “disruptive innovation.”

Something about the melting pot of culture, ideas and economic freedom makes America the perfect home for inventors, innovators and entrepreneurs.

And the pace of innovation has only gotten faster and faster, with entirely new industries cropping up almost overnight — like mushrooms in the dark.

One of these fascinating new runaway industries is shale oil and gas.

Sixteen years ago, the industry didn’t even exist. Shale oil output was zero.

Oil companies knew it was possible in theory to extract oil directly from shale, and they had an idea of how much it would cost. But they’d never implemented those methods in the real world.

Then, in 2008, oil hit $147 per barrel. And it was like a starter pistol had just been fired.

At first, shale production was prohibitively expensive.

The early practice of hydraulic fracturing (“fracking”) also led to some controversy in the news (Matt Damon even made a self-funded movie about fracking that none of us watched).

But since then, the industry has been evolving at lightspeed. It’s rapidly reduced production costs, and grown shale oil and gas output at a rate that no one was ever expecting.

Get this… Last year alone, shale oil production grew by more than 1 million barrels per day.

Shale’s success has been so massive that it’s being felt all the way across the world, even in the Arab nations of OPEC…

These “petrostates,” as they’re called, rely on oil- and gas-related revenues to run the government. If oil prices dip below $80 per barrel, they start running deficits and risking civil unrest.

Meanwhile American shale producers have reduced their own costs so far that they can still be profitable even if oil’s at $70 a barrel.

That’s likely part of the reason why OPEC’s surprise oil production cuts had little effect on the oil market in 2023.

The cartel pledged to cut 1.6 million barrels per day of production last April. Then in November, they pledged to cut another 2.2 million barrels starting in the new year.

We’ve also heard plenty of stories about Russia, China and India “abandoning the petrodollar” to get around energy sanctions on Russian oil and gas.

But none of this news has even moved the needle. Oil prices are actually a few dollars lower now than they were last year before the cuts.

This is indicative of a serious paradigm shift that’s already transforming the oil industry as a whole…

Crumbling Cartel vs. The New Beverly Hillbillies

OPEC has always had a “dirty little secret.”

Its members frequently cheat. They rampantly ignore their self-imposed export limits and violate the terms of the cartel.

That’s why so many of the recently announced production cuts were voluntary on behalf of larger exporters like Saudi Arabia. If they weren’t voluntary, no one would expect members to comply.

Even then, some of OPEC’s smaller members have zero interest in maintaining the illusion of power.

Angola recently dropped out of the cartel, seeing no value in forcing production cuts when its own economy is only slightly more well-off than Venezuela’s. They’re following Ecuador, who left in 2020, and Qatar, who exited in 2019.

The party isn’t exactly over. Not yet at least. But OPEC’s boldest years are certainly behind it.

Meanwhile, shale assets are becoming an increasingly hot commodity — and sending a whole new generation of Clampetts to the land of swimming pools and movie stars.

ExxonMobil’s deal to buy Pioneer Resources made headlines last year as the seventh-largest acquisition of the decade. The reason for the $60 billion acquisition? Pioneer’s massive stake in the Permian Basin’s Cline Shale.

Even south of the border in Argentina, controversial new President Javier Milei is working hard to unlock the Vaca Muerte formation, one of the world’s largest shale deposits with more than 300 trillion cubic feet of gas reserves and 16 billion barrels underground.

Shale is very clearly taking off. And if you’re not already invested, it’s still not too late.

To get a deeper look into the industry, I had my Chief Research Analyst Matt Clark perform an “X-Ray” analysis on the iShares US Oil & Gas Exploration & Production ETF (NYSE: IEO).

Here’s what that looks like, with Green Zone Power Ratings sorted from high to low (just click to zoom in):

As you can see at the top, the ETF itself only rates a 66, but we’ve got quite a few tickers that rate above a 90 on their own. Some investors would call that “diversification,” but to me it fees too much like dead weight.

That’s why I always recommend using an ETF as a starting point instead of the destination. With Green Zone Power Ratings you can zoom in further and get a clearer picture.

In this case, we can see that Gulfport (NYSE: GPOR) has a truly outstanding rating across the board, in addition to its 187,000 acres in the Utica Shale. If you’re looking for compelling mid-cap shale gas investments, GPOR is worth a deeper look.

Here Comes the “But”…

But the rise of shale oil and gas isn’t all sun and rainbows.

It’s crucial to stress that this is a supply-side story. And even then, it’s not the whole supply story.

Because even with the rapid growth in shale oil production, overall supply is still set to fall short of ever-rising demand.

And while the balance of power among suppliers is clearly changing, that still doesn’t tell us anything about the future of oil demand.

The global economy isn’t exactly firing on all cylinders right now.

China’s COVID-19 lockdowns were among the strictest and longest lasting. Everyone expected 2023 would be the year China’s economy finally came alive again, but that hasn’t happened (not yet, at least).

When demand inevitably picks back up, shale oil and gas producers will quickly be overwhelmed, and oil prices will start soaring all over again.

So I’m recommend all my readers take immediate action to take advantage of oil’s powerful momentum in 2024.

To good profits,

Adam O’Dell

Chief Investment Strategist, Money & Markets

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