With President Obama pocketing key Republicans for another round of Middle Eastern déjà vu, the oil bubble is slowly building up. Any chance of a bust seems unlikely with the Obama administration focusing on pooling international support for military measures in Syria over its alleged use of chemical weapons. Moreover, higher demand from emergent economies across the globe is adding to the price pressure.
Our apprehension is fueled by the clouded outlook on a number of key oil producers round the globe. On one hand we have the Syria issue, on the other there’s Libya with its domestic turbulences and the resultant fall in output. Egypt too offers no promise with oil majors like BP plc (BP - Free Report) knocking for their billion dollar dues.
The oil companies smarting under low prices see this as a solid scope to recover the highs seen in the heydays of 1970s. Also, any disruption in the Middle Eastern geopolitics will take a major toll on import dependant emerging nations like India and Indonesia.
The direct fallout of the Syrian military buildup was the spike in Brent crude prices which hovering around $115 per barrel has witnessed steady rise over the past three months. Fearing large scale geopolitical disturbances in the coming days, players like Apache Corp. (APA - Free Report) have already announced the sale of a third of its Egyptian assets to focus more on onshore U.S.
West Texas Intermediate (WTI), aided by multiple crude oil transportation systems in recent times has witnessed lower inventory bottlenecks. The WTI price is currently trading for around $108 per barrel.
In such a scenario, we believe any military action in Syria by the U.S. will push up Brent price to around $124 per barrel in the near term. However, WTI price – helped by infrastructural developments alongside higher production from unconventional oil and gas plays such as the Bakken, Eagle Ford and Marcellus shale – would remain largely insulated from the oil spike. Also, recent macro economic data in the form of lower unemployment numbers, receding weekly jobless claims, and Q2 productivity data are painting a positive picture for the U.S. economy.
As such, we foresee a purgatory of widening spread between Brent crude prices and WTI to affect the health of the global economy. This has come at a time when U.S. investors are scrounging for yield in the face of rising Treasury yield, and the North American energy boom.
Here domestic exploration and production players with a Zacks Rank #1 (Strong Buy) like Matador Resources Co. (MTDR - Free Report) and Range Resources Corp. (RRC - Free Report) offer a window of opportunity for investors looking to avoid the oil spread purgatory.