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The amount of crude oil now sloshing around in tankers and other storage facilities is staggering. With an Iran deal potentially coming to fruition and domestic production continuing at a rapid pace, oil supply will be plentiful for the foreseeable future. …

U.S. energy production

United States energy production is here to stay, as the U.S. is now the largest oil producer in the world. ...

...This increased competition from the U.S. led the Organization of the Petroleum Exporting Countries (OPEC) to flood the market with oil in an effort to curtail U.S. production. Much to the surprise of OPEC, U.S. oil production proved resilient. Each day, shale producers become more and more efficient, and correspondingly, their breakeven point (originally thought to be around $65-$80 per barrel) is now considerably lower.

Due to these efficiencies and heavy start-up investments already out of the way, frackers are driving their breakeven point to around $50-$60. According to the U.S. Energy Information Administration’s (EIA) July 2015 report, “production is expected to generally continue falling through early 2016 before growth resumes.” The EIA anticipates any drop in U.S. production to have minimal effect, as output is expected to remain above nine million barrels a day.

Refiners

Year to date through July 16, the overall energy sector was down 6%, and down more than 25% over the past year. However, refiners are benefiting from low oil costs. Refiners are able to profit from low input costs and sell their refined goods at prices that do not fall as quickly as crude. Specifically, the difference between the monthly average spot price of gas or diesel and the average price of crude oil purchased composes the profit of a refiner. This spread widens as crude prices move down.

U.S. refineries are particularly attractive in comparison to their international counterparts because of their ability to refine West Texas Intermediate (WTI) crude vs. the global benchmark, Brent Crude. WTI is plentiful in the U.S. and extremely light and sweet, which allows it to be easily converted to gasoline. The drilling boom in the U.S. permits refiners to purchase WTI several dollars cheaper than Brent. Given the low input costs and increasing production in the U.S., we expect this trend to continue. …

 

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