Oil and gas sector from first to worst: Where I’m putting my money now

There’s always a bull market in energy—you just have to know which sub-sector to buy.

In Q3 2103, oil producers in North America were the place to be, as higher international oil prices (Brent) dragged the North American price (WTI) up.

Another big factor in Q3 was the sucking sound of new pipelines moving the oil logjam from Cushing, Oklahoma (where WTI is priced) down to Houston.

Now, in Q4, the sound of autumn leaves being crunched is actually the institutions rolling out of producers… and into refiners.

That’s the Market all of a sudden waking up to the huge production increases coming out of the Bakken, Permian, Eagle Ford and Wattenberg oil plays. Refinery stocks are soaring this week.

So let’s have a quick look at the various sub-sectors of the North American energy complex, and see where investors should be putting their money (and I’m going to go from first to worst):

1. Refineries

The investment case here comes down to one simple fact.

The US cannot export crude oil, but they can export refined products.

That means all the new light crude coming out of the tight oil plays (READ: shale) is hostage to the limited light oil refining capacity in North America.

And as domestic light oil replaces the last drop of imported light oil—which should happen sometime I the next 15 months—light oil will drop in price. It is dropping in price right now in anticipation of this.

But geopolitics—and a tighter oil market—is keeping Brent high.

And the US is now exporting 3.5 to 4 million barrels a day of refined products. Americans have to compete with foreign buyers for their own driving gasoline, home heating fuel, jet fuel, etc.!

And all those foreign buyers are willing to pay Brent based pricing for refined products.

The profit for refiners is the spread between that cheap domestic crude and the expensively priced refined fuels they sell.

And right now Brent is $19 above WTI, and $30 above Bakken light oil.

A couple things could ruin this trade—a Presidential exemption to export oil (good luck with that), Brent prices also falling a lot, or US oil demand increase a lot.

There are no pure play refinery stocks in Canada; you must invest in US independent refiners to play this trend. More on this money-making opportunity below.

2. Oil Field Services (OFS) Sector (also called Energy Services)
I believe North America will continue to get drilled like Swiss cheese, for both oil and gas.

So that should be good for the services sector like drillers and frackers and other supply chain companies to the drillers and frackers.

The charts of the big integrated OFS companies—Halliburton (HAL-NYSE) Helmerich & Payne (HP-NYSE) look great.

Other stocks like Nabors and Schlumberger (SLB-NYSE) have just come off year highs.

There’s not a lot of pricing power in OFS now however—except for one sub-sub-sector—and they have great charts—but you have to be a paid subscriber to my service for me to tell you what they are 😉.

3. Heavy Oil Producers

Heavy oil producers should fare better than the light ones. That’s because there is a lot more heavy oil refining capacity in the US than light oil.

BP’s big Whiting refinery in Illinois is supposed to be coming online in January, increasing heavy oil throughput from 85,000 bopd to 350,000 bopd—that’s a lot more demand!

Heavy oil actually traded at a premium to light oil in the Gulf Coast some days this year. And when Devon Canada put their assets up for sale this week, they kept the heavy oil assets.

As I said, though, the Hot Money is leaving the producers—pricing in cheaper oil.

Keith Schaefer is editor of Oil and Gas Investments Bulletin