In November, OPEC announced its agreement to cut production for the first time in eight years. The impact was felt around the globe. Oil prices have already climbed 17.5 percent as of December 27, priming the global oil and gas investment landscape for significant gains in the new year. Online oil and gas investment platforms like EnergyFunders.com have seen signups skyrocket.
What prompted the change, and how does that impact strategies for global investors?
Middle East caps oil production to preserve cash reserves.
The oil industry is a crucial source of income for major Middle Eastern players like Iran,Iraq, Kuwait and Saudia Arabia. But when hydraulic fracturing (known as “fracking,”a technique used for many decades for oil extraction but modernized in recent years) entered the scene, suddenly the United States became a perceived threat as a new major competitor in the energy industry. In 2015, the International Energy Agency went so far as to project that with the advent of modernized fracking, it was only a matter of time before the United States displaced Saudi Arabia as the world’s largest oil producer.
In an attempt to apply financial pressure to the United States oil and gas production industry, OPEC manipulated the market to cause oil prices to drop dramatically. The thought process was that production with modernized fracking, which was about 10 times more costly per barrel than traditional drilling methods, wouldn’t be able to survive the price drop.
But the fracking production industry has won the game of chicken. And, in the meantime, OPEC tapped a bit too deeply into their cash reserves while weathering the price drops. In October 2015, CNN Money predicted that if the low prices continued, most countries in the region would run out of cash in five years or less.
OPEC’s recent agreement is indicative of the Middle East oil powers overplaying their hand — and is possibly also a reaction to the recent United States election results.
United States election results adds fuel to the fire.
President-elect Donald Trump has made it clear that he is pro-oil and pro-fracking. His support has been underscored by his nomination of Exxon CEO Rex Tillersonas his secretary of state, and former Texas Governor Rick Perry to lead the Energy Department.
With this team in place, it’s safe to predict that making the United States a leading player in the oil and gas industry — one to even surpass Saudi Arabia as a supplier — is high on the list of the new administration’s priorities. This has opened the floodgates of speculation as to which country will wind up on top, and has further primed the prices of oil and gas to rise.
The market is hot — now’s the time to buy.
With prices finally on the rise, now is the time for global investors to enter the oil and gas sector. There are four main traditional approaches to backing oil and gas ventures:
- Large cap stock or ADRs — investing directly in large oil and gas company publicly traded stock.
- Mutual funds or ETFs — buying shares in oil and gas-focused mutual funds or ETFs, allowing investors to back oil and gas without tying up funds in a single company.
- Futures contracts — purchasing derivative securities that give the holder the right to buy oil at a specified price at a later date.
- Small or micro-cap stock and limited partnerships — investing in smaller oil and gas company publicly traded stock, or even LLCs that focus on oil and gas.
And, newer to the scene, crowdfunding FinTech platforms are granting greater accessibility to investors than ever before — and people are taking notice. OPEC’s decision to cut oil production, coupled with the recent agreement from non-OPEC members to also reduce production, has led to a 46 percent increase in signups to invest directly into American oil and gas wells over the course of December (as reported by EnergyFunders, an online oil and gas investment marketplace).
It’s an exciting time for the oil and gas industry. Whatever method global investors may use tobuy into the energy market, they should do so quickly to take advantage of the gains to be had by getting in the game early on.