OIL & GAS
The oil and gas industry is under pressures that will transform it. The effect of other industries on oil demand, the increasing opportunities for non-conventional oil and gas that offset perceptions of limits to conventional resources, and the shift of growth to Asia will all compel the industry to look for growth in value rather than volume, to distinguish between the expanding markets of developing countries and the declining markets of the private sector in developed countries, and to target technologies to a diversity of resource opportunities outside the state sector and to specialized partnerships within it.
How the industry changes is important for those who invest in it, depend on its products or try to avoid the environmental and social effects of using them, or who look for tax revenues from its activities.
​The Industry​
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The Petroleum (Integrated) Industry is a mature, cyclical sector that encompasses several business lines. The typical company here conducts oil exploration and development programs, refines and markets oil, and may produce chemicals. The emphasis has long been on the "upstream" end, or exploration, since it generates the highest margins most of the time. Sizable spending is mainly directed overseas, where most oil reserves are found.
Stocks in this industry are most appropriate for investors stressing above-average total return potential over a 3- to 5-year period. There is special suitability for conservative investors, given the solid financial strength of many of the companies and the comparative stability of their stock prices. Ties to the business cycle usually mean the industry doesn't do as well when the economy is in a downturn. But good dividend yields provide downside support.
​​Margins Depend On Oil Prices​
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Industry profits and capital spending are broadly determined by the level and direction of oil prices. Factors influencing prices include supply and demand, the futures market, and long-term sector expectations, among other things.
​The Cartel​

The single largest petroleum supplier, OPEC (Organization of the Petroleum Exporting Countries), carries considerable weight when it makes a decision. The cartel acts as the swing producer in the market. Non-OPEC producers have a harder time adjusting their output, given a lack of spare capacity. Petroleum demand typically ticks up about 1% a year, on average. Down years tend to occur only once in a generation. Most of the increased call for oil comes from up-and-coming nations in the Asia-Pacific region. Demand in Europe and North America is flattish, as energy efficiency is emphasized in mature regions to control emissions.
THE POLITICS
THE STRUCTURE
THE CHALLENGE
This industry is unique in that geopolitics plays a big role. Security concerns in several key oil-producing nations have made it difficult to maximize production. Other countries have taken a go-slow approach to exploration. These factors are a drag on drilling potential, but they support long-term oil prices. Cost inflation can be a problem during boom times. The industry tries to keep expenses under control by ordering bundled packages from oilfield service providers to gain volume discounts. Slack periods often give rise to manpower reductions.
This industry contains several of the world's largest companies, some mid-tier players, and a handful of pure refiners. Balance sheets tend to be strong, with a moderate amount of leverage. Most of the international oil giants have assumed modified variations of the integrated business model by lightening up on low-margin refining or economically sensitive chemicals manufacturing. One reason that companies are less eager to own refineries, especially in mature regions, is because the high cost of purchasing crude oil tends to dampen returns. The need to upgrade plant and equipment to meet tightening environmental standards is another deterrent.
What does this mean for the U.S.?
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Well, it depends. We can continue with our current core energy policy of development and exploration, in which case the U.S. will look much the same as it does today in terms of the energy landscape. Alternatively, if stringent regulatory policies are put into place and incentives are given to alternative fuel developers, it is plausible that the U.S. will have a much higher concentration of alternative energy sources.
Infrastructure, gulf oil spills, greenhouse gasses/global warming, increased regulation, crude oil prices. Many of these themes have been resonating in the news recently and often come to the forefront of conversation when discussing oil and gas. However, when discussing the future of the oil and gas industry, there are a few key, long-term, driving factors, particularly regional considerations and financing.
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​Regulatory and Economic Considerations
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Every oil and gas project is unique for a number of reasons, one being geographic location. When looking at the future of the oil and gas industry, specifically the next five to 10 years, you have to look at specific regions and approach your assessment from a regional angle. Yes, oil and gas exploration is an international industry; however, different regions of the world face a myriad of issues.
In general, the exploration landscape will be driven by two main factors, regulatory issues and economic returns. Each market is going to react differently than another. A combination of these two issues is what will drive and shape the oil and gas landscape in any given region.
For example, while there are economic benefits to exploration in the U.S., the current oil and gas industry faces increased regulatory issues and therefore the future of the landscape will be dependent on how regulations evolve and what this means to participants’ economic returns.
Comparatively, many African countries have a more economic focused agenda. Based on their current economies, and what a growing oil and gas industry can mean to their countries, they are likely to focus on economic prosperity over regulatory policies. While a regulatory agenda may soon follow, there are currently attractive incentives in place to promote African oil and gas development.
FORWARD THINKING
​CRUDE OIL​
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High U.S. crude and fuel stocks, worries about North America and Europe’s growth outlook, a strong dollar and an impending fight over raising the U.S. debt ceiling have weakened oil prices to around low-$90s a barrel. Partly offsetting this unfavorable view has been a demand uptick from developing countries.
The immediate outlook for oil, however, remains tepid given the commodity’s fairly positive supply picture. In particular, while Saudi Arabia is likely to cut back on its production, global oil output is expected to get a boost from sustained strength in North America, Iraq, Nigeria and Angola. On the other hand, the growth in global liquids fuel demand will be relatively soft in the absence of a strong global recovery.
According to the Energy Information Administration (EIA), which provides official energy statistics from the U.S. Government, world crude consumption grew by an estimated 0.9 million barrel per day in 2019 to a record-high level of 89.2 million barrels per day.
In our view, crude oil prices are likely to exhibit a sideways-to-bearish trend. With domestic demand relatively soft and the global economy still showing signs of weakness, the fact that supply will be outpacing consumption appears to be evident.
As long as sharp crude output growth from North America continues and the world demand is unable to keep up with that, we are likely to experience a pressure in the price of a barrel of oil. We assume that crude will trade in the $90-$95 per barrel range for the near future.​

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NATURAL GAS
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Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ -- natural gas trapped within dense sedimentary rock formations or shale formations -- has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.
With the advent of hydraulic fracturing (or fracking) -- a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals -- shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves.