When To Cash In On OPEC's Endgame

by: Oil & Energy Daily

John Hofmeister, the former president of Shell (NYSE:RDS.A), recently insisted that the United States has more oil reserves than Saudi Arabia.

Is he right?

Or have too many gas fumes negatively affected his judgment?

Let's examine…

The United States has around 30 billion barrels of oil reserves that are proven - and a further 198 billion barrels that are "technically recoverable."

Now, most investment analysts conveniently forget what "technically recoverable" means.

MIT defines the term as "the volume of petroleum which is recoverable using current exploration and production technology without regard to cost, which is a proportion of the estimated in-place resource."

So, "technically" speaking, Hofmeister is pretty spot on.

The United States is in the driver's seat - just as long as the cost of extraction is less than the price of the commodity on the market. A move in prices below the cost of production would render the reserves worthless, as the profit motive would disappear.

That's why trillions of cubic feet of natural gas in places like British Columbia will never see the light of day. It simply costs too much to drill and bring the gas to market.

But don't go selling shale oil stocks just yet. I'm still uncovering massive profit opportunities in the sector.

Still Time to Get on Board

When you hear that a good chunk of the reserves are at risk of never being produced, it's easy to jump the gun and start selling.

But it's important to understand that the day production will cease is a long way off.

So companies like Pioneer Natural Resources (NYSE:PXD) and Cimarex (NYSE:XEC), which are sitting on millions of barrels of shale oil, will be making money hand over fist for a few years to come.

Not to mention that - as long as prices stay above $80 per barrel for West Texas Intermediate - that's where OPEC will keep prices, too.

I mean, at $80 or $90 per barrel, OPEC members are making a lot of money. Same goes for U.S. producers.

Plus, as global economies grow - especially those in China and India - excess production coming out of the United States can be sopped up by demand. And the Saudis have the singular ability to cut back or increase production to either make up for any potential shortages - or create them.

In other words, everyone makes money.

When to Practice Caution

Problems will only arise when the United States hits peak production in a few years.

We can't forget that U.S. reserves - when compared to those held by OPEC member countries - are still quite small.

So the Saudis and OPEC can afford to play the waiting game.

They'll keep prices stable and allow the United States to produce all of its cheaply recoverable oil. Then, as "tight oil" begins to live up to its name, oil production in the United States will begin to fall - and oil reserves will continue to deplete. This would hand total control of the market back to OPEC.

That's when you'll see oil rise to levels over $150 per barrel.

Bottom line: For now, oil prices will remain stable to negative as world supplies are picking up steam. And the United States is definitely winning the oil production battle. But in the process, it's "technically" losing the war to an opponent that has the ability to withstand decades of competition.

And 'the chase' continues.

Karim Rahemtulla

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Oil & Energy Daily is a team of financial researchers. This article was written by Karim Rahemtulla, one of our financial researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.