With Rising Oil Prices, Could Shale Oil be Set for a Recovery?
2016 has been a time of volatility, speculation, and uncertainty for the global energy markets. During the first quarter of 2016, oil prices were at low levels that threatened the profitability of many energy firms.
These price-related issues were caused by a supply glut in the global market for oil. This excess supply was partly caused by OPEC’s heavy production of crude oil. While members of the oil cartel pumped reserves into the oil market, countries like Russia, Canada, and the United States expanded their domestic energy resources.
This combination of factors resulted in decreased earnings for both large and small oil firms. A poor outlook in the crude oil industry means that investors may soon flee to alternative energy industries. The shale oil industry is a favored candidate among many investors who aim to keep their assets in the energy sector.
Investors Retreat to Alternative Industries
According to a basic analysis of earnings and losses, falling crude oil prices mean that all firms in the industry will have reduced profits in 2016. These reduced profits mean that residual claimants will also suffer losses. This will result in many investors leaving the crude oil industry. Since many investors always maintain energy stocks in an effort to diversify their portfolios, it is unlikely that retreating investors will completely abandon the energy market. Instead, they will use their funds to invest in industries that produce substitutes to oil.
Many investors will not immediately decide to invest in shale oil firms. Since green energy is currently a favorite industry for many people, Tesla and other tech companies will probably be popular options. While it is likely that green energy will eventually be a viable and profitable option, investors may not see adequate returns until the industry evolves. It is also probable that the popularity and high prices of tech stocks are a result of a bubble driven by irrational exuberance. Because of this, green energy may only be a suitable option for long-term investors with buy-and-hold strategies.
Fortunately, the shale oil industry presents investment options that can offer short-run returns to investors. Shale oil prices are currently on the rise, so investors may be able to increase their earnings with an expanding industry. Prior to the rapid drop in crude oil prices, shale oil prices fluctuated around $25 per barrel. This low profitability deterred investors, and many shale oil firms could not compete with crude oil producers. In the current energy market, this role is reversed; low crude oil prices are driving investors into the shale oil industry.
In May 2016, the Washington Post reported that shale oil prices rose beyond $50 per barrel. This price is only slightly lower than crude oil prices, and many energy experts expect the shale oil industry to capture more of the market. These rising shale oil prices are a direct result of increased domestic consumption of shale oil in the United States. If the demand for shale oil continues to increase, prices will also rise. If American shale oil producers increase exports, both the West Texas Intermediate and Brent grades of oil will experience price hikes.
Shale May Not Yet Be a Full Alternative to Crude Oil
According to Forbes, investors should not be overly optimistic about opportunities in the shale oil industry. While the price of shale oil is expected to increase, the shale industry is plagued with inefficient business models.
Low oil prices in 2015 and 2016 caused many shale oil companies to default on loans. As equity increases, these defaults may result in volatile stock prices during the final quarter of 2016. Many small shale oil firms were also eliminated with price shocks, so competition is inadequate in several areas of the United States. This results in high exploration, production, and transportation costs.
If investors hope to take advantage of rising shale oil prices, these problems must be corrected immediately. Long-run competition from green energy firms and tech companies threatens the sustained success of shale oil companies, so growing companies in this industry may be short-lived.
Current predictions suggest that long-term success may be out of reach for shale oil companies, but the shale oil industry can still be a suitable option investors leaving the crude oil industry. Only time will tell how shale oil and other energy industries evolve.
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