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Winter is Coming

Written By Brian Hicks

Posted December 18, 2014

Yes, crude oil has fallen by about 45% since June to a five-year low, and a surge in shale drilling increased U.S. output to the fastest pace in three decades amid decelerating world demand.

Many energy companies have seen their stock prices fall by even more, with a long way still to go to the bottom. To make matters worse, prices are pressured even further by signs that an already ample supply will be greater in the new year.

But before anyone makes the call for the demise of Big Oil, take note that crude oil is trading far below support levels. The markets aren’t called cycles for nothing. I’m counting on a big comeback.

Despite oversupply woes, the market will correct itself as it always does.

The Most Wonderful Time of the Year

For retail, that is. We’re seeing the beginning of a trend that has already marked the biggest increase in U.S. sales in eight months.

Increased wages and cheaper fuel gave American consumers the means to do more holiday shopping in November, propelling the retail gains and giving the economy a much-needed boost.

A surge in job creation and the lowest gasoline prices in over four years are giving households the power to sustain the current levels of spending in retail, which accounts for almost 70% of the economy.

The strengthening job market is one of the reasons for the boost. Payrolls rose by 321,000 last month, the most in almost three years, after a 243,000 gain in October. The jobless rate maintained a six-year low, and average hourly earnings rose by the most since June of 2013.

November’s sales gain was the biggest since a 1.5% advance in March. The increases at building materials, clothing, and department stores were the biggest since April. Gross domestic product grew at a 2.4% pace in the third quarter from the same period a year earlier.

During the holidays, consumerism is king, and that bodes well for all industries — even Big Oil.

With all of these numbers up, confidence will go with it… along with cars on the road — the majority of which are run by your standard internal combustion engine.

Industry figures showed sales of cars and light trucks rose to a 17.1 million annualized rate in November from 16.4 million the previous month after peaking in August at 17.5 million, the most since January 2006. This means more traveling and, in turn, more revenue for all related industries.

An increase in sales in the automotive industry means higher fuel consumption despite the offsets in place from the rise of green vehicles and lower fuel prices.

For instance, take a look at Ford Motors (NYSE: F). Not primarily known for its energy-efficient vehicles, the stock has seen some major upside recently despite the growing trend towards environmentally friendlier options.

While not to be taken as a representative of the market as a whole, it certainly carries some weight as a minor barometer of the market in addition to creating demand for oil companies.

Everybody Loves a Comeback

American oil output is the highest it’s been in over 31 years, and economic growth is gaining traction. So why is American petroleum demand diminishing?

As the U.S. moves closer to energy independence and improved fuel efficiency, changing demographics and an increase in renewables shift the landscape that has contributed to high oil demand in the past and present.

The shale boom has driven U.S. output to its highest on a weekly basis since 1983, with oil production up 65% in only five years and the U.S. supplying 89% of its own energy this year. The U.S. will export more energy than it imports in less than 10 years.

Growth in the U.S. energy market has been driven by a combination of horizontal drilling and hydraulic fracturing, which has unlocked supplies from shale formations including the Bakken in North Dakota and the Eagle Ford in Texas.

The discovery of domestic oil and the ability to extract it will incentivize the government to find a use for it either on American soil or abroad.

Higher production has allowed the U.S. to import the least oil in almost two decades, build more chemical plants, and increase fuel shipments abroad to 3.6 million barrels a day — the most in the world. Combined with lower prices, rising output has spurred calls for the government to lift restrictions on most U.S. crude exports.

As you can see, the U.S. is already a major exporter and has been developing itself to become more efficient at processing and capitalizing on oil for years. With a massive surplus that’s only going to grow, exports will climb even further.

Despite the oil industry taking a beating, or even because of it, it might be time to buy. You remember what they say about blood in the streets, don’t you?

For starters, look into NuStar Energy L.P. (NYSE: NS), MV Oil Trust (NYSE: MVO), and Ford Motors (NYSE: F).