U.S. Now World’s Largest Producer of Oil & Gas

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
July 15, 2014

IN THIS ISSUE:

1. US Passes Russia, Saudi Arabia to #1 in Oil Production

2. Multiple Risks/Threats to Global Oil Production

3. North America Leads Crude Oil Production Gains

4. Islamist State of Iraq & Syria – A Dangerous Threat

5. Why ISIS Should Worry Americans & Europeans

6. Our Next WEBINAR on July 23 Featuring YCG

Overview

Recent reports have confirmed that the US is now the world’s largest producer of crude oil with output exceeding 11 million barrels per day in the 1Q of this year. This surpasses the daily oil production of Russia and Saudi Arabia.

This is the first time in over 40 years that the US has once again become the largest producer of oil in the world – and this is despite the Obama administration’s continued ban on new drilling for oil in our coastal waterways.

Oil extraction is soaring at shale formations in Texas and North Dakota as companies split rock formations believed to contain oil using high-pressure liquids, a process known as hydraulic fracturing, or “fracking.”

This oil boom has dramatically lowered petroleum imports into America. The share of US fuel consumption met by imports is down from 60% in 2005 to 33% in 2013 and is expected to fall to 22% in 2015, which would be the lowest since 1970.

US Passes Russia, Saudi Arabia to #1 in Oil Production

US oil production has jumped from 5.0 million barrels per day in 2008 to 7.4 million last year and is expected to average 8.5 million this year and 9.3 million next year, according to the Energy Information Administration, the analytical arm of the Department of Energy. If crude oil separated from natural gas is included, that figure jumps to 11.0 million barrels per day this year.

According to the Paris-based International Energy Agency (IEA) and a new report from Bank America Corp., the United States recently topped Russia and Saudi Arabia in total oil production to become the #1 producer in the world. The US became the world’s largest natural gas producer in 2010.

This oil boom has significantly lowered America’s need for petroleum imports. The share of US fuels consumption met by net imports, down from 60% in 2005 to 33% in 2013, is expected to fall to 22% in 2015, which would be the lowest since 1970.

Texas and North Dakota now account for almost half of total US oil production according to the Energy Department, which noted that Texas’ monthly oil output recently topped 3 million barrels per day for the first time since 1977 and North Dakota’s oil production hit a record 1 million bpd.

The widely-followed IEA now expects the US to remain the #1 producer of crude oil until at least 2019 when production is expected to peak at 13.1 million barrels a day and plateau thereafter. Even so, the IEA suggests that the US could remain the #1 producer of oil for another decade or longer after 2019.

Crude Oil Prices

Crude oil prices in the US have retreated somewhat since the news on US oil production was announced earlier this month, but it remains to be seen if prices will fall significantly below $100 per barrel. Crude prices have been rising since the first of the year due to various global concerns ranging from Russia’s aggression toward Ukraine to the ISIS terrorist takeover in parts of Iraq and Syria (more on that below).

Multiple Risks/Threats to Global Oil Production

The International Energy Agency predicts that global oil demand growth will rise next year as the world economy expands and will again be met by rising supplies from the United States and Canada. However, the IEA warned in its monthly report last week that risks to oil production in several regions remained acute:

“Supply risks in the Middle East and North Africa, not least in Iraq and Libya, remain extraordinarily high. Oil prices remain historically high and there is no sign of a turning of the tide just yet. Whether in crude or [oil] product markets, there is little room for complacency.”

North Sea Brent crude oil hit a nine-month high above $115 a barrel in June as the ISIS insurgency swept across northwestern Iraq, taking control of significant territory and shutting down a large refinery (more on this below). Fortunately, most of Iraq’s oil production and export terminals are located in the southern part of the country.

The oil market has weakened somewhat over the last few weeks but remains nervous about further supply shocks. West Texas Intermediate crude remains near $100 per barrel, while Brent crude is still trading near $105 per barrel as this is written.

North America Leads Crude Oil Production Gains

Making its first forecasts for 2015 in its July report, the IEA which advises major consuming nations on energy policy, estimates that global oil demand will grow by 1.4 million barrels per day next year, up from growth of 1.2 million this year. The IEA expects newly industrialized and emerging market economies to once again lead the gains in oil demand next year.

The world’s second largest oil consumer, China, will see oil demand growing by 4.2% in 2015, up from 3.3% this year, while the largest oil user, the United States, will only see gains of 0.2% to 19.1 million bpd, up from a growth of 0.6% this year according to the IEA.

The IEA said it forecasts non-OPEC supply growth to average 1.2 million bpd next year, in line with increases in 2013 and 2014. Yet North America will remain the leader in 2015, contributing about two-thirds of the net non-OPEC crude oil supply increase.

Increases in US light crude oil, mostly from North Dakota and Texas, as well as Canadian bitumen, are expected to represent well over half of the 2014 non-OPEC supply growth according to the IEA. It added that the Eagle Ford shale boom in South Texas will remain one of the most dynamic oil provinces with output growing by 34% to 1.4 million bpd this year and exceeding 1.6 million next year.

The IEA reported that while the US and Canada remain the mainstays for crude production growth, other countries are also making progress – including Brazil, Britain, Vietnam, Malaysia, Norway and Columbia among countries which will grow output in 2015.

Islamist State of Iraq & Syria (ISIS) – A Dangerous Threat

ISIS is a radical jihadist militant group in Iraq which has taken control of a large swath of northwestern Iraq and parts of Syria. ISIS was formed in April 2013 and grew out of al-Qaeda in Iraq and Syria. It has since been disavowed by al-Qaeda, reportedly due to its ultra-violent and inhumane terrorist tactics.

ISIS is led by Abu Bakr al-Baghdadi. Little is known about him, but it is believed he was born in Samarra, north of Baghdad, in 1971 and joined the insurgency that erupted in Iraq soon after the 2003 US-led invasion. In 2010 he emerged as the leader of al-Qaeda in Iraq. ISIS is fighting to establish a new Islamist state (“caliphate”) that straddles Iraq and Syria.

In June 2014, The Economist reported that “ISIS may have up to 6,000 fighters in Iraq and 3,000–5,000 in Syria.” The group has seen considerable military success. In March 2013, it took over the Syrian city of Raqqa - the first provincial capital to fall under ISIS’ control.

Members of the Islam State of Iraq and Shaam (ISIS) with senior commander Abu Waheeb

In January 2014, it capitalized on growing tension between Iraq’s Sunni minority and Shia-led government by taking control of the predominantly Sunni city of Fallujah, in the western province of Anbar. It also seized large sections of the provincial capital, Ramadi, and has a presence in a number of towns near the Turkish and Syrian borders.

ISIS leaves a path of destroyed churches, shrines and even mosques in its wake. But why would it destroy mosques? Georgetown University professor Yvonne Haddad says, “ISIS sees themselves as the last defenders of Islamic civilization and want to eradicate anything they see as an enemy of Islam, and any Muslim they perceive as compromising with the West.”

A member of ISIS reportedly tweeted that their ultimate target is the Kaaba (Sacred House) in Mecca, Saudi Arabia, Islam’s most holy site. The tweet reportedly said: “If Allah wills, we will kill those who worship stones in Mecca and destroy the Kaaba. People go to Mecca to touch the stones, not for Allah.”

KAABA

Wherever they are in the world, Muslims are expected to face the Kaaba whenever they are praying. Yet these deadly serious terrorists apparently want to destroy it. ISIS reportedly is planning to take over the city of Arar in Saudi Arabia, which is very close to the Iraq border. From there, it is only a 15-hour drive to Mecca.

ISIS is believed to have accumulated up to $2 billion in cash that was taken from banks in cities it now controls and from the sale of oil. In addition, ISIS also has a large stockpile of weapons and ammunition taken from Iraq’s military facilities and elsewhere in the northwest.

It is widely believed that ISIS has its sights set on taking control of Baghdad, Iraq’s capital with a population of over seven million. Some analysts feel that ISIS is not capable of taking control of Baghdad due to its size. Let’s hope this is true!

If ISIS were to control the Iraqi government, then it would control the oil. And Iraq exported apprx. 2.4 million barrels per day in 2013. If those exports are disrupted, that could cause an explosion in oil prices. Stay tuned.

Why ISIS Should Worry Americans & Europeans

While ISIS is growing rapidly, most analysts agree that its number is still around 10,000 fighters. And they are located in a relatively small geographic area in northwestern Iraq and eastern Syria. If the US was of a mind to, it could take out much of this terrorist group with drones and/or targeted air strikes. Not to worry, right?

Yet President Obama has refused to take any meaningful action against ISIS despite the significant threat it poses to the Middle East – and ultimately the US. Never mind that many US soldiers lost their lives liberating these same Iraqi cities that ISIS now controls.

The worst part is that intelligence experts estimate that ISIS may have up to 3,000–4,000 foreign fighters, many of whom came from Europe and the United States. Those who carry American passports and could easily return to this country (not needing a visa) and apply their deadly training here. Those holding European passports could travel not only to their home countries but also to America without much trouble.

ISIS is likely not a threat to countries outside the Middle East at the moment as it has its sights on Baghdad and gaining control of the Iraqi government, however unlikely that might be. But should ISIS gain control of Iraq and the oil, it would have access to vast sums of money and could become a dangerous international threat almost immediately.

Should this happen, it would almost certainly have serious implications for the markets, so I’ll stay on top of it as always.

YCG Investments Webinar – Wednesday, July 23 at 2:00 Eastern Time

On Wednesday, July 23 at 2:00 p.m. Eastern Time, we will be presenting a live WEBINAR featuring Brian Yacktman and Will Kruger with YCG Investments who will talk about their YCG Concentrated Composite Strategy. This strategy leverages Brian and Will’s expertise in investing in stocks that are trading below their intrinsic or true value. Their stock selection typically includes growing businesses in less cyclical industries that are less capital intensive.

We all know that the latest hot stocks seem to garner all the attention. All the hype often pushes these stocks to trade at 40-50 times earnings or more. Facebook, for example, trades at over 80 times earnings! YCG stays away from stocks like these. They focus on “value stocks” with solid earnings and growth. These stocks tend to be less volatile.

YCG performs a thorough analysis of each company, including looking at its product, people and most importantly, its price. They understand that even a great business is a poor investment if purchased at a high price. A low purchase price of the right stocks can help create a margin of safety.

So how has YCG’s Concentrated Composite Strategy performed? Since the program’s inception in 2008, it has an annualized return of 17.0%, net of fees and expenses, with no losing years. You can see more detailed performance information, including Important Disclosures, on our Fact Sheet. As always keep in mind that past results are not necessarily indicative of future results.

With the stock market at a new record high, many are wondering if a correction is imminent, or if the markets will continue to move higher. While we can only speculate where the markets will go next, I do know that YCG attempts to find undervalued stocks that are less cyclical, with the goal that they will be impacted less when there is a drop in the market. This gives you the potential to participate in gains in the market, while managing for risks if the market should drop.

The live webinar will give you the opportunity to ask the managers themselves any questions you might have about this strategy. To register, simply CLICK HERE. If you are unable to attend the live version of the webinar, we'll send you a link to the recorded version on our website for you to watch at your convenience.

We all know that procrastination can be the enemy of investing. Yet millions of investors are doing just that – waiting on the sidelines, afraid to do anything, or waiting for some type of “all clear” signal from the market. If you keep waiting, you may miss out on future gains, or you may never get back in the market.

For those of you already in the market, YCG lets you stay in the market, but with an eye on managing risk. So when the markets do eventually drop, the impact on your investments may be less. So sign up today for this informative webinar on July 23 at 2:00 p.m. Eastern Time.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

US: Oil production in 2015 to be highest since 1972

Iraq: political stalemate continues as ISIS inches closer to Baghdad

The brutal and inhumane tactics of ISIS

IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM) and YCG Investments, LLC (YCG) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. HWM receives compensation from YCG in exchange for introducing client accounts. For more information on HWM or YCG, please consult the respective Form ADV Part 2, available at no charge upon request. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

YCG claims compliance with Global Investment Performance Standards (GIPS). YCG has provided HWM performance numbers calculated in compliance with GIPS that have been independently verified from November 1, 2008 – June 30, 2013. Verification assesses whether 1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and 2) the firm’s policies and procedures are designed to calculate and present performance in compliance with GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. The verification report is available upon request. The returns shown are based on a composite of all discretionary portfolios managed with a medium concentration level of approximately 15-30 positions. The strategy invests in companies of all market capitalization ranges. Performance reflects all income, gains and losses and the reinvestment of interest, dividends and other income. Returns are net of fees, calculated using actual investment advisory fees that have been incurred by all fee paying accounts according to their respective investment advisory contracts (some of which may be lower or higher than fees paid by HWM accounts).

These performance numbers have not been verified by HWM, and therefore HWM is not responsible for their accuracy. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the YCG Concentrated Composite Strategy. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; v) accounts may hold different securities depending on when the client invested and any restrictions placed on the account; and vi) the rate of brokerage commissions, transaction fees and management fees charged to an account may vary. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the YCG Concentrated Composite Strategy.

In addition, you should be aware that (i) in the YCG Concentrated Composite Strategy, your principal is not guaranteed and there are risks involved; (ii) the YCG Concentrated Composite Strategy’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) YCG will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the YCG Concentrated Composite Strategy’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Management fees are deducted quarterly, and are not accrued on a month-by-month basis. “Annualized” returns take into account compounding of earnings over the course of an investment’s actual track record. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.