It’s Official: We Won The Oil War! Now Here’s How To Play It…

This post It’s Official: We Won The Oil War! Now Here’s How To Play It… appeared first on Daily Reckoning.

Most economists were dumbfounded when Saudi Arabia declared war on U.S. oil companies last year.

Oil-producing countries in the Middle East would traditionally counter low oil prices by cutting oil production. It’s basic economics. When you decrease the supply of something the price naturally moves higher.

But Saudi Arabia took an entirely different approach.

When U.S. shale oil companies increased production through a technique called “fracking” (fracturing rock formations with high-pressure water and sand), Saudi Arabia decided to flood the market with oil.

The Middle Eastern empire believed that if they drove the price of oil low enough it would put the U.S. “frackers” out of business and allow Saudi Arabia to keep its share of the global oil market.

The result, as you probably know, is that oil prices dropped from a one-year peak near $108 per barrel to a low near $46.40 in March. That’s more than a 57% drop.

It seemed for a while that Saudi Arabia would win the battle. Many U.S. companies using fracking technology have seen their profits drop. Some have even gone out of business.

But U.S. oil companies are still in business despite it all. And some are now arguing that these companies are stronger as a result of Saudi Arabia’s economic war.

Today I’m going to show you how to collect your fair share as U.S. oil companies adjust to an environment of lower oil prices.

Necessity Is the Mother of Invention

While researching the oil market this weekend I came across a very interesting article by Mark Perry. Mark is a scholar at the American Enterprise Institute in Washington and professor of economics and finance at the University of Michigan.

According to Perry, U.S. producers have been hard at work responding to the decline in oil prices. Since these companies must sell the oil they produced at a lower price, they desperately need to reduce their costs to remain profitable.

In the time-honored spirit of American ingenuity, drillers have been experimenting with new processes and different materials for fracking oil wells. The result has been lower costs and quicker turnaround times for drilling wells into shale rock formations.

According to new data from Statoil, the company has cut the amount of time it takes to drill in one location from 21 to 17 days. More importantly, the cost of each of these wells has dropped from $4.5 million to $3.5 million.

The bottom line is that creative U.S. oil companies are now able to make a profit even though oil prices are lower. While Saudi Arabia believed it could put U.S. producers out of business if oil remained below $80 per barrel, it now appears that U.S. oil companies will be able to make a profit even if oil prices settle out around $50 per barrel.

That’s great news for U.S. companies involved in drilling oil wells.

Today, we’re going to look at Weatherford International (WFT: NYSE).Weatherford provides equipment and services to the drilling industry. As oil prices declined, WFT shares dropped 62% from a 2014 high of $24.88 to a low of $9.40.

Shares have rebounded to a current price near $14.30 as the outlook for Weatherford has improved. Investors now realize that as the technology for drilling improves, WFT’s business will remain solid. Analysts expect the company to post a slight loss this year as the oil industry adjusts. But WFT should post a profit of $0.42 per share in 2016.

As investors begin to realize that U.S. oil companies can make money even with lower oil prices, I expect shares of WFT to trade higher. In fact, I would be surprised if WFT didn’t surprise investors and actually post a profit this year.

Zach Scheidt
for The Daily Reckoning

P.S. Ever wonder how you can make a lot of money from oil without owning a well? Or whether or not you should buy gold and silver? Or is fracking just a flash in the pan? Get insight, insider scoops and actionable investment tips twice a week with Daily Resource Hunter? Just click here for a FREE subscription!

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