Oil Investing: 5 Things To Expect In 2014

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January 11, 2014 1:04pm NYSE:DTO NYSE:OIL

oil-etfGarrett Baldwin: The global oil market in 2013 was dominated by geopolitical disruptions, a huge boom in U.S. domestic production, and double-digit gains for energy investors.

Energy stocks (NYSEARCA:XLE) rose about 18% in 2013.

This year’s gains should be even better, especially if investors follow the five biggest oil investing trends of 2014.

Just look at what’s happening in the United States…

The U.S. Department of Energy predicts that the boom in domestic oil production is going to reach levels not seen in more than 50 years by 2016. In fact, the United States is expected to add 1 million barrels in additional capacity by the end of next year, another reason why the United States will remain the world’s leading oil-producing nation.

So, what about the rest of the world? Hundreds of factors will influence the global oil markets in 2014, but no trends are bigger than these five.

Here’s a look:

2014 Oil Investing Trend No. 1: The Texas Oil Boom Continues

Texas is the place to invest if you’re looking to capture a reliable stream of energy profits in the year ahead.

Oil production in the Lone Star State increased another 18% in 2013, which followed a 35% increase in 2012. The state’s total share of U.S. oil production has now gone from 18% in January 2013 to 40% today. The United States is now the world’s largest oil producer, and Texas oil development has dominated the production boom.

In 2014, investment in Texas oil is only going to accelerate. Domestic production in other states is currently being hindered by infrastructure problems, and, of course, higher taxes. Tack on the favorable investment environment, vast shale fields, and proximity to refineries, and you’ve got yourself a nice big source of profits.

Investors should target midstream pipeline companies that provide producers greater access to the Gulf Coast refinery network and producers in the Eagle Ford and rapidly developing Permian shale fields.

2014 Oil Investing Trend No. 2: Renewed Iranian Capacity a Welcome to Global Markets

The Iranian appeasement over its nuclear program will facilitate millions of new barrels of oil each day entering the market, creating temporary concerns about over-supply.

Recently, at the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Iranian Oil Minister Bijan Namdar Zangeneh announced that the nation was “technically ready” to begin production of 4 million barrels per day (bpd) when sanctions end in the summer months of 2014. That will have a profound impact on the global markets, particularly for global Brent crude prices.

Sanctions by United States and European Union on Iran’s energy sector prohibited western energy firms from interacting with Tehran. It led to a reduction in Iranian exports from 2.5 million barrels per day to a little less than 1 million. Now, that’s set to change the global market fast.

The new supply will help reduce higher global prices of Brent in London, while reducing the spread against WTI crude, which is priced in New York.

The U.S. Energy Information Administration (EIA) forecasts that the WTI-to-Brent discount, which reached $20 per barrel in February 2012, will narrow to $8 next year. But it won’t be due to an increase in Brent or WTI price. As greater production in the U.S. continues, and geopolitical issues from 2013 begin to fade, new Iranian supply will help reduce demand concerns in China and India.

2014 Oil Investing Trend No. 3: Rise of Rail Transport in the Northwest

The growth of oil shipments by rail was one of the biggest stories of 2013.

And that trend will only accelerate in 2014, making midstream investments in railcars and storage a favorable play. In the face of the Obama administration’s refusal to approve the Keystone Pipeline, TransCanada has now proposed increases in rail shipments to remove the glut of oil in Alberta, Canada.

Rail transport is thriving up north. In November, Canadian National Railway (NYSE: CNI) announced its recent quarterly revenue from crude transports increased 150% over last year. We’re expecting that revenue to jump for all participants in the industry.

And it’s not just Canada. Rail projects will expand from North Dakota and the Bakken region in 2014. According to the North Dakota’s Department of Mineral Resources, up to 90% of the region’s crude oil will ride out of the region on rails next year. This provides a better boon to producers seeking higher prices in a variety of spot markets across the country.

And it provides a nice midstream play for investors looking to cash in, particularly in high-yield energy transportation and storage companies.

2014 Oil Investing Trend No. 4: Politics on the Roof of the World

Without a doubt, the biggest geopolitical story outside of Iran is taking place in the Arctic Circle. According to the EIA, the Arctic Circle contains 15% of all undiscovered oil and 30% of all undiscovered natural gas. But who owns all those hydrocarbons?

That’s going to be up to the United Nations in 2014 and beyond. Canada recently shocked the world by claiming that the North Pole and various uncharted areas are part of its sovereign territories.

Russia isn’t having that argument. In fact, President Vladimir Putin recently announced he will militarize the Arctic Circle and reopen Soviet bases in the Arctic Ocean in order to flex the nation’s muscle over oil politics.

Next year, the Arctic story will dominate the oil world, as global producers rush to survey available fields and begin to develop existing technologies to make it possible to capture the black gold sitting beneath more than a mile of icy waters.

2014 Oil Investing No. 5: Lower Prices at the Pump

The dramatic increase in U.S. oil production over the last years has fueled an increased glut of supply across the nation. As a result, WTI prices and the price of oil-based products have experienced a steady decline in recent months.

The general consensus for U.S. oil prices is around $95 per barrel. Of course, should the Permian Basin continue to boom, and production costs fall, some analysts predict a decline in oil to fall as low as $70 to $75 per barrel in 2014.

That seems a bit too low, unless producers shut off certain rigs around the country in the wake of falling prices.

Even a decline to $85 to $90 (barring a significant geopolitical event) would be a significant boost to the U.S. economy and the pocketbooks of Americans. Any reduction in costs at the pump will only fuel stronger economic results for the United States, as consumers are able to allocate their money to more important goods and services in their lives.

Expect lower gasoline prices through 2014, as even more U.S. production creates a glut in supply. As a result, it is best to avoid exchange-traded funds tied to oil and gas prices until a bottom begins to form in the months ahead.

Money MorningWritten By Garrett Baldwin From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.

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