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We're past peak OPEC

To fathom oil prices - and gauge energy firms' earnings and the North Sea's economic prospects - don't fuss over OPEC. Fathom America's shale industry instead.

So many see this wrong. Every rumor about OPEC production cuts spurs hundreds of headlines, speculating over the price impact. Hard to know why, but I suspect it's an historical bias, a leftover legacy of the late 20th century. 

First there was the Arab oil embargo, which caused supply shortages and soaring prices.

Then came  the 1980s, 1990s and 2000s' "peak oil" fears as US production dwindled and everyone feared we'd run out of crude. Saudi Arabia, then the world's swing producer, could effectively control global supply growth, pumping more or less depending on whether it wanted to nab market share or boost prices.

Their price influence was often overrated, but now that's even truer. Last decade's high prices spurred a flood of technology investment into horizontal drilling and hydraulic fracturing as American firms sought to exploit massive shale oil reserves.

The oil wasn't easy to access, and extraction costs were high, but record-high oil prices made it profitable. Oil rig count soared and US production skyrocketed, ultimately creating a global supply glut that whacked prices hard. Without US shale, Brent crude doesn't fall 75% from June 23, 2014 through February 11, 2016. 

New competition

America's new oil era created another multi-headed, multi-corporate swing producer, answering only to price signals - not cartel or government directives. OPEC? Neutered. Crude initially rose after the cartel's much-ballyhooed November 30th Russian deal to cut production, but the rally lasted just two months. Since February 2, Brent is down 6.3%. America's benchmark, WTI, is about even with its November 30 price.

Many pinpoint OPEC. Wrong! Though members are tightening, progress on cuts isn't great. Initial reports suggested about 94% compliance with pledged cuts. More recent reports from Reuters peg it at 82%. Now headlines dwell on whether they'll extend the cuts into 2017's second half.

But OPEC isn't the reason global oil supply, which briefly dipped in 2016, is rising again. America is responsible! US inventories hit record highs for four straight weeks through early March. Active rig count has nearly doubled since 2016 lows. 

A funny thing happened over the last two and a half years: With oil prices low and firms desperate for profits, they got more efficient, devising cheaper ways to get more oil. For instance, firms figured out "dead" wells weren't really dead, and if you went away and came back, you could re-claim more oil - no new exploration or drilling required.

Cheaper! Breakeven prices have fallen across America's major shale formations, reaching as low as $30 per barrel in Texas. WTI is $49.47 a barrel. Low by historical standards, but profitable.

Prices are marvelous motivators. As they stabilized last year, producers locked in higher prices with futures contracts, added rigs and started pumping away. Some firms tapped the "fracklog" of wells drilled before oil's crash - but had never tapped. Others used new 3D seismic imaging technology to cheaply discover new reserves and started drilling. America's shalers are now nimble and quick, and slow-moving OPEC is no match.

It's rough in the North Sea

For Britain, the upshot is probably a struggling North Sea. Sorry. Most projects there have breakeven prices near $60 per barrel, forcing producers to cut back and get lean even as America ramps up. Where US drilling activity and oilfield investment rose in Q4, they fell in Britain. Mining output (which includes oil) fell -7% quarter-on-quarter. Oil dragged UK business investment negative. 

This also radically changes the calculus for Nicola Sturgeon's quest for a second Scottish referendum. Last time, high oil was a boon for Scotland's finances and a rallying point for the independence campaign. This time, cheap oil makes independence extra-risky.  

As for your portfolio, Britain's higher extraction costs probably make US refiners and vertically integrated giants a better buy than UK Energy firms.

And globally? Since oil flipped from an economic headwind to a tailwind in America, growth is speeding up, giving the world a nice push. Bull markets don't end when the world is accelerating, as it is today. Keep owning stocks like these:

Cloud computing seems in clear skies, great for Salesforce.com. Don't expect it to show material earnings soon - or for that to stop its stock. Revenue growth will propel it. For stocks like this net earnings are less critical than growth plus fat operating margins plowed back into more growth - which are fully 70%. As it crosses $10 billion in revenue in its January 2018 fiscal year, it should emerge a halo stock like Amazon has been off and on for years.

Some big drug stocks didn't have a great 2016, but hang tough. Before America's Obamacare gasps its last they'll shine. Improving in that realm is Britain's own GlaxoSmithKline, as its new respiratory drugs breathe life into a stock selling at 14 times my 2017 earnings estimate with a 5% dividend yield.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. 

Ken Fisher has been regularly featured in the financial media for over 30 years and was the pioneer of the Price-to-Sales ratio as a tool for investment analysis. Since 1979, Fisher Investments and its subsidiaries have provided customised guidance to institutional and individual investors. For more information on Ken Fisher and Fisher Investments UK please visit www.fisherinvestments.co.uk.