The more OPEC rattles its saber, the more likely Western countries shift production to domestic sources.
Over the past two years, oil drilling activity has taken off in the United States. Robust activity in gas shales, such as Haynesville and Marcellus, drove natural gas prices to new lows. But, despite significant growth in oil field development, crude prices remain stubbornly high due to Middle East reliance and supply disruption risk.
However, this reliance is shrinking. A 5.8% increase in lower 48 U.S. domestic oil field production has driven oil imports down. And only Saudi Arabia represents the Middle East in the top five sources for U.S. imports.
OPEC imports, as measured in thousands of barrels a day, fell to 4,267 in the most recently reported month of October, down about 1% from 2010, but 27% lower than 2008. In the first 10 months of 2011, we imported 7.3% less oil from OPEC per day than in 2010.
In the most recent week, active rigs operating in the U.S. stood at 2,007 - the highest weekly reading since 1985 when Dynasty and Dallas were among TV's top rated shows. The boom in shale is far from news to investors. Explosive development from majors, including Occidental (OXY) and Exxon (XOM), alongside independents including Chesapeake (CHK) and Continental (CLR), have been leasing and drilling as fast as they can across Eagle Ford and the Bakken.
As a result, the oil trade has become pretty crowded, which is why Thursday's inventory build spooked some investors and forced producers down more sharply than during prior inventory builds. But where onshore activity is priced into stocks, the surge in offshore activity may still provide opportunities for deepwater equipment and services plays, including for Oceaneering International's (OII) remotely operated vehicles, Helix's (HLX) contracting services and FMC Technologies' (FTI) subsea trees.
There are 64% more rigs operating in the Gulf of Mexico than this time last year, thanks to a return to permitting last spring. While Gulf activity remains timid compared to pre-BP levels, last month's Gulf of Mexico auction supports future E&P growth. In 2006 there were nearly 100 rigs active in the Gulf, suggesting upside remains.
At the same time, a shift in resources away from the Gulf following the BP spill opened up new areas of interest across the Mediterranean, including offshore Israel and Cyprus, and in West Africa. These areas are unlikely to see a drop in activity as the Gulf of Mexico increases, as Europe is eager to reduce its reliance on Iranian crude.
So, while ramping domestic production doesn't bode well for WTI crude prices (USO), rising offshore development, which has a long tail and is far less volatile, provides upside support for offshore equipment and services stocks.