A New Milestone in the U.S. Shale Boom

A new milestone in the U.S. shale boom... America is another step closer to becoming the 'new Saudi Arabia'... Two worrisome signs for the rally in crude oil...

Longtime readers know Stansberry Research has been covering the U.S. shale boom since the beginning...

As far back as 2006, Porter began to warn that "Peak Oil" worries were nonsense... and noted that new drilling technologies were already creating a glut of natural gas in the U.S.

Following the financial crisis, he was among the first analysts anywhere to predict these same technologies would soon unlock vast amounts of American oil, too.

In 2012, he noted that U.S. oil production was beginning to accelerate, and started to warn readers that prices – which were near $110 per barrel at the time – couldn't remain high for long.

And in 2014, with oil trading near $80 per barrel, he issued one of his strongest warnings – and boldest – predictions to date. As he wrote in the November 7, 2014Digest...

I would be shocked if U.S. oil prices aren't below $60 per barrel by next year. They could fall to as low as $40...

My forecast for U.S. crude oil below $60 a barrel is way out of consensus. But even today, few people really understand the magnitude of what has been discovered... and the scope of the energy assets now being exploited in U.S. shale fields.

The more shale drilling the industry does, the larger the estimates of total reserves become. In the Permian Basin in West Texas, for example, early estimates based on a few hundred drilled wells were around 20 billion to 30 billion barrels of recoverable oil.

You may recall what happened next...

Prices plunged below $60 almost immediately. They started 2015 below $50 per barrel. And they ended the year below $40, just as Porter expected.

But this wasn't the only prediction he made in that Digest...

In fact, you could argue it wasn't even the boldest. You see, he also predicted that the shale boom would last for decades... and would ultimately see the U.S. become the world's "new Saudi Arabia." More from that Digest (emphasis added)...

In 2004, the U.S. exported roughly 3 quadrillion British thermal units (Btu) of "high value" energy – that's natural gas, crude oil, and petroleum products (mostly gasoline).

That number doubled over the next six years, thanks almost entirely to increases in liquid natural gas production in shale fields. By 2010, the U.S. was exporting 6 quadrillion Btu of "high value" energy – mostly propane.

Today, we're exporting roughly 9 quadrillion Btu of "high value" energy every year. This trend of U.S. energy exports is going to explode over the next decade. Massive investments are being made right now to expand energy export capacity in the U.S. Perceptions about the benefits to U.S. crude oil exports are finally changing, too...

The U.S. oil and gas industry has decades of growth ahead of it. We are only in the first innings of this trend, which will see America emerge as both the world's largest producer and the world's largest exporter.

At the time, many folks would have scoffed at the notion...

But not anymore. The U.S. has been a "net exporter" – meaning it sends more to other countries than it brings in from abroad – of propane and other petroleum liquids for several years. Now, we can say it's officially a net exporter of natural gas for the first time, too. As Bloomberg reported last week...

Net exports averaged about 0.4 billion cubic feet per day last year, flipping from net inflows of 1.8 billion in 2016, according to Victoria Zaretskaya, a Washington-based analyst for the U.S. Energy Information Administration...

A "significant projected increase" in natural gas sent by pipeline to Mexico and a growing number of liquefied natural gas [LNG] shipments to the rest of the world should guarantee the trend moving forward, Zaretskaya said...

"Never before has the global LNG market had such significant flexible LNG volumes as the volumes coming online in the next three years, mostly from the U.S., which will lead to a fundamental shift in how LNG is marketed and traded globally," Zaretskaya said.

Speaking of oil, prices have continued their rebound this year...

Last week, West Texas Intermediate ("WTI") crude – the U.S. benchmark for prices – passed $63 for the first time since Porter issued his warning in 2014.

The latest highs followed news that U.S. oil inventories fell for the eighth straight week. They now sit at their lowest level since August 2015.

While this suggests that OPEC's plan to reduce the global glut has been working better than expected, there are now signs that it may have gone too far.

Most important, at current prices, almost all U.S. shale producers can earn a profit...

So we'd expect to see both production and "hedging" to lock in higher prices begin to ramp back up. And that's exactly what has happened...

The oil "rig count" – the number of rigs actively drilling for oil in the U.S. – has been rising again. U.S. firms added 10 oil rigs last week, for a total of 752 active rigs, according to oil-services provider Baker Hughes. That's the biggest weekly increase since last June.

Meanwhile, news service Reuters notes that U.S. shale firms added more than 144 million barrels of oil to their hedges over the last quarter. According to the U.S. Energy Information Administration, this all but guarantees total U.S. production will rise to a new all-time record of more than 10 million barrels per day this year.

But that's not the only reason for concern...

Today, traders are incredibly bullish on oil again.

Regular Digest readers are familiar with the Commitments of Traders ("COT") report. This report is published weekly by the U.S. Commodity Futures Trading Commission, and shows the real-money bets of futures traders across dozens of asset markets.

And according to the latest COT report, speculative traders are now more bullish on crude oil than ever before in history.

As we often say, if there's one constant in the financial markets, it's this: Popular investment ideas are usually losers. Whenever the "crowd" is heavily betting one way, it's often a good time to take the other side of that bet.

In short, we now have similar conditions to those that led to the last plunge in crude...

In its quest to stabilize the market, OPEC has thrown a lifeline to even the most troubled U.S. shale firms. They can now ramp up production again – thanks to hedging – continue to produce even if prices begin to fall.

Meanwhile, speculative traders have gone "all in" on oil, and will likely rush for the exits at the first sign of trouble.

It's a near-perfect recipe for lower prices.

New 52-week highs (as of 1/15/18): Altius Minerals (ALS.TO) and Sprott (SII.TO).

A busy day in the mailbag... Several readers respond to Porter's Friday Digest and share their experiences with TradeStops. As always, send your notes to feedback@stansberryresearch.com.

"Porter – for most of my investing life, I have been a speculator and not an investor. It has hurt me and my family to be foolish. Your admonitions and advice about the wise ways to invest I have mostly ignored. After reading Friday's Digest, I will take portfolio management seriously.

"The shame and hell of it is I should know better, for many reasons. Therefore, starting now, I will be a real-time n=1 case study in learning from my mistakes and listening to sages. I'll report periodically on my progress (in case you have insomnia). Thank you for your brutal honesty and the respect and concern you consistently show for your subscribers. Very refreshing." – Paid-up subscriber LAF

"Porter and Team – much respect for your honesty and integrity. Not sure I'm the typical Alliance Member. I signed up for products, cancelled some, added others, sweated over the decision to join as a Flex Member and had a really hard time with the Alliance upgrade. My wife would still kill me today if she knew what I spent. I complained at times but kept reading all your newsletter issues and listening to podcasts to learn along the way. I lost a lot of money early on because I knew enough to be dangerous but didn't know what I didn't know.

"I spent the past couple years making up my losses and finally feel I have a fighting chance to grow my wealth with your services. I've unfortunately subscribed to too many other newsletters along the way but have learned to pick and choose the advice given and always come back to your level-headed analysis of the markets. I understand you have a business to run and must promote your products accordingly so I don't criticize your promotional activities and have learned to objectively assess the recommended strategies and hype.

"I just wanted to let you know that you provide a valuable service to your subscribers that most don't stick around long enough to appreciate. I feel fortunate to have learned about your services through an unconventional political website and stuck around long enough to consider your organization in partnership with me and my family's financial future. What separates your organization from others is 'Trust'. There are a lot of fine businesses out there but very few that you can associate the word 'Trust'. I can sleep well at night knowing that the financial advice I receive from Stansberry Research, with Porter's leadership, is sound, trustworthy and honest." – Paid-up Stansberry Alliance member Jim Lofgren

"Porter, this is the first time I have written but believed it was long overdue! I took a risk right after the financial crisis and dove in to become an Alliance member. I have learned a great deal about stock and bond investing thanks to you and your excellent team. I have watched my wealth grow far beyond what I would have thought possible. I became a lifetime TradeStops member, participated in the [Grant's Interest Rate Observer] WebEx (one recommendation from this event has yielded 122% profit thus far), True Wealth China Opportunities (each and every one up double digits) and others as they became available. I am still a little skeptical about strategies with fancy names like the 'Golden Triangle' LOL but time will tell. I for one want to say thank you to you and your team and will be paying close attention to your warnings for 2018." – Paid-up Stansberry Alliance member Wayne S.

"Porter, thank you for presenting again, information that is essential to investment success. My investment in Stansberry Alliance has been my best financial investment. I wish you and your family good health and much laughter in '18.'" – Paid-up Stansberry Alliance member M.B.

"Porter, I read some comments complaining about too much advertising, and I think it was in regard to your discussion and recommendations using TradeStops. At first, I too was skeptical of the value of TradeStops because I thought well, I could follow my own trailing stops for free.

"Well, I attended an Alliance meeting in Nashville some time back and had some great discussions with fellow members and one fellow was telling me about how he used TradeStops and I went home and bought it! The risk rebalancer is the most useful thing I have seen yet. Not only will it optimize your gains on your whole portfolio (if you follow the recommended steps to take), I now use it when I am going to buy a new stock recommendation from one of your publications...

"It has brought order into an otherwise once chaotic world. It has stabilized my gains where on a good market day, I usually beat the top market performer of the day and on the down days the losses are not near as bad as before if at all. I can also diversify more safely using your recommendations. I can now read your letters and feel enlightened rather than dumbfounded. Thanks for holding those regional conferences as I look forward to attending more and keep telling us what we need to hear, it eventually penetrates the rock." – Paid-up Stansberry Alliance member David Griggs

Porter comment: Thanks, David!

"Porter, OK, so you do read these... I like that. Somebody who gives a crap... hard to find these days.

"I started with TradeStops early and am a lifetime member. I follow my stops and don't so much as rebalance as I buy into positions to adjust balance. I try to evaluate the 'best' time to buy based on value, but over the past year I've been less concerned, figuring this rise to the fall would cover value (or, in other words, investing at a less than optimum value in this market was better than letting the cash sit in savings, so long as I follow my stops). Right or wrong, that's what I've been doing. My total risk per TradeStops sits at just over 9, so pretty good.

"I ordered a copy of your Jubliee book (terrifying), and I'm getting electronic access to my broker's real-time stream. I write software for a living and wanted to evaluate positions in real time for value purchases, kind of the opposite to TradeStops. Instead of telling me when to sell, the numbers would tell me when a stock was value priced. Just an idea, and for fun. But I'm hopeful it'll turn into a useful tool. I can't monitor Bloomberg or your terminal like you guys can, so I need some sort of tool to let me know when a good time to buy occurs. It may never turn out, but I'm learning a good deal as I think about it.

"But at the end of the day, I'm a little guy. Putting $2000 into the market is a big deal for me. Even so, I'd love to dig deeper into options and puts, knowing someday I can roll larger sums in (I never, or rarely ever, buy 100 shares of anything given the high prices today). I'm hoping to prove you wrong there too. The only thing stopping me is funding.

"I do have several of the distressed bonds you recommended. Awesome. I can see you're right... buy the right bond and who needs stocks (unless we juice the deal). I am waiting for that to fire up again when the stuff hits the fan. There should be a good number of bonds in the distressed category, and I'm hoping to swoop in and pick up quite a few.

"Anyway, sorry to have taken so much of your time. I try to read everything you send, and more importantly, I try to evaluate it critically and apply it to my situation. Frankly, I paid too much money to ignore what you're trying to tell me. I paid the money because what you're saying reflects what I'm seeing with my own eyes. So not proving you wrong may very well spell doom. 🙂 Thank you for your advice. [I'm] a humble and not very wealthy subscriber, but a believer." – Paid-up subscriber Kenn S.

Porter comment: Kenn, I appreciate your business. But I would recommend being a "thinker" rather than a "believer."

Gurus want followers. We prefer fellow seekers.

We're always striving to learn more. We don't have the answers... but we are trying our best to find them.

"Your message is right on target! I bought [Hershey] on your recommendation, but did not have resolve to keep it! Kicking myself every time I look at what it has done." – Paid-up subscriber Bill E.

"I read with much interest your essay on risk. Do you have a list of companies that qualify as being similar to Hershey? I enjoy the excitement of higher risk trades, however as I move toward retirement I agree that I should focus on reducing risk. Thanks." – Paid-up subscriber W.G.

"Thanks for the clear and present danger warning. Time for a list of the top capital efficient companies from your letters perhaps? Cheers." – Paid-up subscriber Shaun C.

Porter comment: We've maintained an updated list for years. Stansberry's Investment Advisory subscribers can see the Capital Efficiency Monitor on our website.

Regards,

Justin Brill
Baltimore, Maryland
January 16, 2018